Mass. transit overseers vote to unwind costly swaps

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BOSTON – State transportation system overseers are moving ahead on unwinding a series of swaps, sophisticated financial bets on the direction of interest rates, that have kept part of the state’s transportation-related debt payments locked in at higher rates.

Terminating the interest-rate swaps with UBS and Deutsche Bank is part of a broader effort on the part of the Massachusetts Bay Transportation Authority and the state transportation department to get more favorable terms on its debt. It is sold by Wall Street banks, who earn significant fees from the transactions, as a way to hedge against the risk of higher costs on variable-rate debt, providing a kind of financial insurance.

The swaps have let the state pay off its variable-rate debt at fixed rates. But those rates have generally been higher than those charged on comparable variable-rate debt, as interest rates have remained near historic lows for much of the past decade.

“Had rates gone up these would have been an asset with value to the authority,” June Matte of Philadelphia-based PFM Group, a municipal finance advisory firm, told the MBTA’s Fiscal and Management Control Board recently. Instead, the swaps have provided a costly insurance policy against what turned out to be a nonexistent risk.

The swaps with UBS and Deutsche Bank have a “mid-market value” of about $81.5 million, according to the T. Advised by the PFM, MBTA officials believe both UBS and Deutsche Bank will be motivated to get out of the swaps and offer discounts. The Boston Globe reported Tuesday that the cost to end the swaps could reach $75 million.

PFM’s presentation didn’t recommend terminating swaps where the T could not achieve a discount on the cost.

Eliminating the swaps would result in more than $100 million in savings over the next 10 years, according to PFM’s presentation.

“I am very much in favor of this and I look forward to welcoming the savings this plan projects,” Betsy Taylor, a member of the MassDOT board and former finance director at the Massachusetts Port Authority, said before officials voted to move ahead with termination of the swaps at a joint-meeting Monday.

The MassDOT Board voted to authorize staff to terminate the swaps.

Transportation Secretary Stephanie Pollack noted that while the debt is owed by the MBTA, which is now overseen now by the control board, the MassDOT Board is scheduled to resume control over the transit agency before the debt is repaid.

Most of the MBTA’s $5.2 billion in outstanding debt are fixed-rate bonds, and further efforts to secure savings could involve refinancing those fixed rates.

Written by Andy Metzger