New Yorks Metropolitan Transportation Authority plans to enter into two forward-starting interest rate swap agreements on about $700 million of debt as a hedge against rising interest rates in 2006, an MTA official said yesterday.
Finance director Patrick McCoy announced the plans at yesterdays monthly finance committee meeting. The swaps will involve a pair of $350 million transactions, he said. McCoy said during the meeting that both deals were competitively bid and would allow the MTA to achieve interest rates on its bonds that were well below budgeted costs for 2006. The MTA currently plans to issue $2.1 billion of debt next year.
Last week, McCoy said the MTA would pay $22 million to terminate a forward starting interest rate swap it entered into last September with Lehman Brothers and American International Group Inc. Lehman, which underwrote the $750 million bond sale executed in conjunction with the forward swap, collects 60% of the termination fee; AIG collects the 40% balance. The MTA has this year paid a total of $39 million to terminate swaps, McCoy said.
McCoy said the upcoming swaps would be the only forward-starting, interest rate swap agreements the authority would enter into for next year. The MTA is entering into the swaps to manage future interest rate risk exposure and to provide budgetary savings.
The budgeted interest cost on the debt underlying the new swaps was 4.87%, McCoy said. At the time the agreements were entered into May 31 and June 3 the MTA was able to capture an interest of 4.39% on one transaction and 4.37% on the other, McCoy said. That does not include an additional seven or eight basis points that are a part of the costs of the deal.
The swaps will be used in connection with the MTAs issuance of dedicated tax fund bonds. First Albany Capital Inc., bidding with BNP Paribas Securities Corp., was awarded 60% of the notional amount of the first $350 million transaction. Lehman was the next lowest bidder and will swap the remaining 40%.
Lehman was the sole winner on the bid to act as the swap counterparty on the other $350 million of debt.
Both deals are based on 67% of one month London Interbank Offered Rate.
Peter Block, an analyst and derivatives coordinator with Standard & Poors, said that entering into a forward starting swap transaction is prudent for an issuer like the MTA,
If you are large issuer like the MTA or a state and you have a capital improvement program and you know you have a capital need totaling X amount over this period of time and you are scheduled to do a $100 million transaction in 06, if you believe rates are going up or you just want to have some budget certainty it is a prudent thing to do, Block said. I dont think you would do it unless you thought rates were going up.
Separately, McCoy said the state authoritys Triborough Bridge and Tunnel Authority unit would enter into $800 million of interest rate swaps as part of a refunding that will come to market on or about July 7. McCoy said he expects the deal to save about $129 million for the TBTA on a present value basis.
The MTA will receive a payment of 67% of one-months value of Libor, and make a fixed-rate payment of 3.976%.
