MTA board gives the nod to refund up to $3.7B BABs

The New York Metropolitan Transportation Authority Board granted the agency approval to refund its outstanding Build America Bonds Wednesday, setting the stage for the MTA to redeem as much as $3.73 billion of its outstanding taxable paper. 

The unanimous vote held at the board's monthly meeting Wednesday did not specify whether some or all of the bonds will be refunded, and the agency said in a statement it has not made a final decision whether to refund the debt. The vote simply gives the MTA the ability to move forward with a redemption if and when it is ready. 

"The refunding or refundings will be undertaken if it's determined that they are in the MTA's financial interest taking into the account the unique economics and risks of outstanding Build America Bonds," the MTA's statement read.

Bloomberg News

The MTA's potential decision to refinance its BABs comes at a time of financial stress for the authority. Its congestion pricing plan, an important new source of revenue which the issuer expects to back as much as $15 billion of new bonds, is facing seven lawsuits which could delay its planned June implementation. 

Refunding the MTA's taxable BABs, which were issued in 2009 and 2010 during the Obama-era economic stimulus program, could likely provide the issuer some cost savings if priced in current market conditions — potentially better savings if the Federal Reserve cuts rates later this year.

The MTA in 2010 priced a 2040 maturity BAB at 6.814% taxable yield at par. A triple-A tax-exempt muni currently yields 3.30%, double-A tax-exempts are yielding 3.45%, while single-A rated paper was at 3.60%, per Refinitiv MMD yield curves as of Wednesday.

The MTA priced a $1.289 billion climate bond certified sustainable bond deal in late March carrying its A3 rating from Moody's Ratings, A- from S&P Global Ratings, AA from Fitch Ratings and AA from KBRA in late March, seeing its 2040 maturity with a 5% coupon yield 3.57%.

A recent report from the New York State Comptroller Thomas DiNapoli found that, even if congestion pricing goes as planned, the MTA's debt service costs will be 51% higher in 2037 than in 2023.

The MTA could become one of more than two dozen issuers this year to refund its BABs. ERPs for BABs have skyrocketed this year, according to J.P. Morgan analysis. 

"In 2024 alone, we have identified 25 unique issuers that have either called BABs (13 issuers, affecting $7.5bn of debt), posted conditional calls (5 issuers, set to impact $2.2bn of debt), or announced that they are considering financing plans in this regard (9 issuers, potentially impacting $1.4bn of debt). Totaling YTD calls and notices of potential redemptions, BAB ERP activity would total $10.6bn for the year," J.P. Morgan analysts wrote. 

The Massachusetts Bay Transportation Authority also announced yesterday Tuesday that it may refund three of its BABs CUSIPs, according to J.P. Morgan.

The spate of refundings has been spurred on by issuers using an "extraordinary redemption provision" that says the federal subsidy for BABs, which began to decline in 2013 thanks to "sequestration" is a "material event" that allows them to call the bonds early. 

The Regents of the University of California was one of the first issuers to refund their outstanding BABs and closed its deal in March, despite a threatened lawsuit from its investors, who said the refundings are illegal because the federal sequestration does not count as an "extraordinary" redemption provision.

A lawyer for the investors that have threatened lawsuits could not be reached before publication.

Several market participants received "favorable guidance" to proceed with refunding outstanding BABs through ERPs following a recently concluded court case, Indiana Municipal Power Agency v. U.S., which Chris Cardall and fellow Orrick Herrington and Sutcliffe partner Barbara Jane League argued in a report posted on the firm's website earlier this year that the decision supports the conclusion that sequestration "resulted in a materially adverse change to the cash subsidy payment obligation," they said.

Amid the wave of planned BAB ERPs, Norfolk, Virginia became the first issuer to cancel its planned BAB refunding last month, thought it did not rule out using the ERP to redeem their BABs at a future date.