MBTA's $1B deal refunds BABs, addresses FTA safety concerns

The Massachusetts Bay Transit Authority priced more than $1 billion of senior sales tax bonds to good demand as the issuer confronts the challenges of ridership and revenue losses like other transit agencies across the country in a post-COVID remote-work environment.

The MBTA also refunded $377 million of outstanding Build America Bonds using an extraordinary redemption provision, joining other issuers in opting to unload their taxable debt with more attractive tax-exempt yields.  

The proceeds of the deal will be used to fund MBTA capital projects, repay commercial paper, and refund the agency's BABs. About 10%, or $97 million, of the bonds were issued as sustainability bonds to finance projects that provide environmental and social benefits. 

Bloomberg News

The MBTA, like transit agencies across the nation, has been forced to reckon with newfound challenges relating to ridership trends, post-pandemic consequences, and decreasing streams of revenue. As a result, the agency scrambles to decide which projects to fund, with enough money for less than 10% of the projects its staff requested, according to Lindsey McCauley, the agency's deputy chief financial officer.  

"As we juggle what we can do, we're juggling less and less," Quincy, Massachusetts, Mayor Thomas Koch and MBTA Board member, said in a June 6 Audit and Finance Subcommittee meeting. "In 10 or 15 years, if we don't get our hands around this, the system is not going to be working. There is a serious problem that we can't, as a commonwealth, continue to ignore."

The issuance is in line with Gov. Maura T. Healey's original budget proposal for fiscal 2025. In the executive summary, the governor called for a 2.9% increase in the current year's overall spending, dedicating $1.5 billion from the state's sales tax revenue in addition to $250 million from the Fair Share income tax to support the agency's capital development plan.

In her budget proposal, Healey outlined how additional issuance would allow the MBTA to "improve safety, reliability, and service."

However, as of Monday, the commonwealth was still without a fiscal 2025 budget, with stop-gap funding in place through July 31. 

In 2022, the Federal Transit Administration decried the MBTA following a safety inspection, and ultimately ordered the agency to immediately improve safety across its subway system. The federal authority's inspection followed a number of incidents, including train derailments, collisions, and multiple deaths caused by system malfunctions. The FTA criticized the MBTA for prioritizing long-term development projects over daily operations.

As part of the 2025-2029 capital investment plan, the agency promises to address the safety concerns outlined by the FTA.  

Last week, Morgan Stanley priced the MBTA's offerings with slightly higher yields than what the issuer offered to retail investors. The first tranche, $987.635 million of 2024 Series A, saw 5s of 7/2025 at 3.25%, 5s of 2029 at 3.07%, 5s of 2034 at 3.12%, 5s of 2039 at 3.39%, 4s of 2044 at 4.07%, 5s of 2044 at 3.74%, 5s of 2048 at 3.95%, and 5s of 2052 at 3.98%, callable 7/1/2034.

The second tranche, $97.705 million of sustainability bonds, 2024 Series B, saw 5s of 7/2054 at 4.00%, callable 7/1/2034.

The bonds were rated AAA by Fitch Ratings and Kroll Bond Rating Agency, and AA-plus by S&P Global Ratings. 

The series 2024 series A and series B sales tax bonds are secured by a pledge of the greater amount of a 1% statewide sales tax, plus $160 million of additional state sales tax per year. In addition, the agency is funded by an inflation-adjusted sales tax revenue base amount distributed by the commonwealth of Massachusetts. 

Karen Krop, senior director of public finance at Fitch, underscored the strength of the tax revenue source. "The bond ratings themselves have nothing to do with the MBTA's performance. They're not even backed by a transportation-related entity," Krop said. "They're sourced by carving off a portion of the state revenue stream. And when we look at the Massachusetts default rating, it's low." 

S&P Credit Analyst Ladunni Okolo also pointed to the strength of the state revenue pledge. "The senior and subordinated sales tax bonds outstanding will continue to have an open lien permitting additional debt issuance using the same additional bonds test coverage multiple," Okolo said. "As a consequence, we expect debt service coverage based on pledged revenue to remain strong and of similar magnitude in the near term for all liens." 

Morgan Stanley & Co. LLC served as senior manager, with J.P. Morgan Securities LLC and Jefferies as co-lead managers. Public Resources Advisory Group acted as municipal advisor, and Mintz, Levin, Cohn, Ferris, Glovsky and Popeo as bond counsel.

Koch underscored the importance of the bond offering to MBTA's success. "We're looking at closing in on a billion, when we should probably be closing in on $3 billion up to [fiscal 2034] … It's troubling.  There is a cliff we're facing both on capital and budget," Koch said.

"We didn't get here because we were spending money wildly," Koch added. We got here because the performance didn't meet expectations, staffing levels went down for a period of years. … The legislature, for the last 20 years, has continued to fill the hole of underperformance that we hit with sales tax. [They] have continued to allow us to operate."