The Washington Metropolitan Area Transit Authority is issuing $625.4 million of second lien dedicated revenue bonds by negotiated sale Tuesday, which should yield an enthusiastic market response.
"As the interest on the bonds will be exempt in D.C., Maryland, and Virginia, I expect strong interest from in-state buyers," said Patrick Luby, head of Municipals, Senior Municipal Strategist, CreditSights.
The proceeds from the sale will be used to pay the costs of issuing the bonds and towards capital costs. As second lien bonds they have a lower priority to be paid back than the obligations ahead of them in line, but S&P Global Ratings and Kroll Bond Rating Agency both rated the issuance as AA.
Per WMATA's official statement, "the 2024A second lien bonds are the second issuance of bonds under the Second Master Resolution and are subordinate to WMATA's Senior Line Obligations and to the pledge created by the 2003 Bond Resolution for the Series 2017AB Bonds."
The sheer size of the deal carries implications for a market that's favoring higher yields and greater risk.
"Nationally, I think that demand is strongest for the yields on low-investment grade rated bonds, but most of the supply has been for mid- to upper-grade investment bonds," said Luby. "I expect that demand for WMATA will be strongest from local buyers, but the size of the deal suggests to me that it will need to be priced to attract attention from national buyers."
Per S&P, "Although the bonds are subordinate to senior-lien obligations outstanding, our assessment of the obligation's relationship to the respective participating entities is captured in our overall assessment of appropriation risk and accordingly, we do not distinguish the bond's position in the waterfall of funds."
BofA Securities is serving as the bookrunning senior manager. The underwriters include Ramirez and Co. Inc., Barclays, Truist Securities, Academy Securities and Blaylock Van. Frasca & Associates LLC and PFM Financial Advisors are the municipal advisors
The bonds are labeled as "Sustainability – Climate Transition," with the BLX Group conducting an independent review of its sustainability program and providing an independent opinion.
BLX participates in the International Capital Market Association as well as the Green Bond Principals and Social Bond Principals programs.
The deal hinges on the credit worthiness of the District of Columbia, the commonwealth of Virginia and the State of Maryland who combine to provide WMATA with about $500 million in revenue per year dedicated to capital funding.
For fiscal year 2025 D.C. is kicking in $178.5 million, Maryland has committed $167 million, and Virginia is providing $154.5 million. The subsidies are all subject to appropriation with Maryland and Virginia capping any increases to their contributions at 3% per year.
"We currently rate the General Obligation debt of District of Columbia as AA+/Stable, Maryland at AAA/Stable, and Virginia at AAA/Stable. Proceeds will be used to support WMATA's capital program," said S&P in its analysis.
According to numbers from WMATA, debt service will cost the organization just over $160 million per year starting in 2025 before falling off to about $80 million per year in 2047.
In addition to the contributions from the municipalities, WMATA's funding is also supported by farebox revenues, which last year made up 20% of the operating budget.
According to WMATA's road show, the ridership projections for fiscal year 2025 show Metrorail making 113.7 million trips, which is a decrease of 2.4%. Metrobus is expected to make 111.5 million trips for an increase of 5.5%. MetroAccess, WMATA's paratransit service which offers door to door rides for the disabled is expected to make 1.48 million trips for a decrease of 4%.
"Certainly, the changed ridership patterns create a concern about the impact on the finances, but since passenger revenues make up less than 20% of the budgeted operating revenues, the impact of lowered ridership is muted somewhat," said Luby. "The reduced ridership also has the potential for an indirect impact on the long-term political support of maintaining or growing support for the system."
To help fill a $750 million budget gap that showed up this year, WMATA initiated a 12.54% rate hike on June 30. The increases affect all modes of transit but avoid any cuts in service. The base fare for the Metrobus and Metrorail went from $2 to $2.25. The maximum fare on weekdays went from $6 to $6.75.
KBRA and S&P are the only agencies rating next week's deal, according to the investor presentation.
But WMATA was buoyed Friday when Fitch Ratings upgraded its issuer rating and the authority's senior bonds to AA from AA-minus.
The upgrade reflects the application of Fitch's revised "Government Related-Entities" criteria, the rating agency said in a news release.
"It explicitly recognizes the likelihood of support from the District of Columbia, the State of Maryland, and the Commonwealth of Virginia," Fitch said. The rating agency also removed the authority's debt from a negative rating watch, and assigned a stable outlook.
The agency is the country's third-largest heavy rail transit agency and sixth-largest bus operator. It was created in 1967 by an agreement between the District of Columbia, Virginia and Maryland to plan, develop, build, finance and operate a regional transportation system.
Public transit carriers in several large cities are looking for ways to stay solvent as federal stimulus money runs dry and ridership remains off as a side effect of the work from home movement. New York City
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