PATRICK-MURRAY ADMINISTRATION SECURES TURNPIKE FINANCING AGREEMENT THAT SAVES TOLLPAYERS MILLIONS
Transportation reform results in deal with UBS to avoid $71 million paymentBOSTON – Wednesday, October 21, 2009 – After months of negotiations, Governor Deval Patrick today announced that the Administration has reached agreement with financial institution UBS that will save the Commonwealth an estimated $71 million.
Due to five risky financial transactions – so-called “swaptions” – entered into by the Turnpike Authority in 2001, the Authority was at direct risk this year of having to pay UBS $261 million. Governor Patrick, Senate President Therese Murray and House Speaker Robert DeLeo passed historic transportation reform that improved the Authority’s bond rating, negating the need to pay $190 million of that amount in July. While four of the five swaps were cured immediately, a fifth was at risk of being terminated by UBS, potentially costing the Commonwealth $71 million.
Under the terms of the deal negotiated by the Administration and signed with UBS, however, the July rating upgrade of the Turnpike Authority’s MHS senior bonds to A- will be sufficient to prevent termination of the fifth swap.
“Transportation reform has already produced significant savings for the people of Massachusetts, and today’s agreement is a further indication of the positive results we can expect to see from our landmark reform,” said Governor Patrick. “I thank the entire team for efforts to reach an agreement that is fair and favorable for the tollpayers and the Commonwealth.”
“This is great news for the Commonwealth as we continue to see the positive results of Transportation Reform even in its earliest stages,” said Senate President Therese Murray. “With an improved bond rating and $261 million in savings already with this latest announcement, we look forward to even more short-term and long-term savings for tollpayers and taxpayers as our new transportation system takes shape.”
“This is just one example of how the transportation reform package will amount to real savings for people across our Commonwealth,” said House Speaker Robert DeLeo. “Amid a season of reform, all three branches are to be commended for eliminating the antiquated and inefficient transportation structure in Massachusetts. Transportation reform is vital to our state’s bottom line, and I look forward to further savings as we move forward.”
The rating upgrades were a result of the sweeping transportation reform that called for consolidation of the state’s fragmented transportation assets into a coordinated new entity called the Massachusetts Department of Transportation. Additionally, the Governor, working with the legislature, signed into law a bill that authorized the Commonwealth to extend its backing to the Pike swaps in the event it became necessary to avoid termination of the swaps. While the rating upgrades and the negotiated result secured by the Patrick-Murray Administration avoided the need for the Commonwealth to extend its credit to UBS, the Commonwealth’s demonstrated willingness to step in was a critical factor in securing the rating upgrades that ultimately solved the problem in a favorable way for the Turnpike Authority and the Commonwealth.
“The rating upgrades on the Turnpike’s bonds and the positive outcome of our negotiations with UBS are the direct result of transportation reform and the collaborative effort of many, including the Governor, the legislature, the Executive Office of Transportation, and the Turnpike Authority,” said Administration and Finance Secretary Jay Gonzalez. “I also want to thank Deputy Treasurer Colin McNaught for his advice and support throughout the negotiations with UBS. Thanks to this collaborative effort, we have secured an agreement that saves the Commonwealth and tollpayers hundreds of millions of dollars.”
The rating upgrades and latest agreement with UBS confirm that transportation reform has fundamentally changed and improved the way in which the state finances and manages its transportation system. Not only has it already saved tollpayers from having to pay $261 million to UBS, transportation reform will also save tollpayers and taxpayers millions of dollars in operating costs and financing costs in the years to come.
“Today’s announcement is another example of the progress we have been able to make as a result of transportation reform,” said incoming Transportation Secretary and MassDot CEO Jeff Mullan. “I want to thank Governor Patrick, my colleagues at the Turnpike Authority, EOT and the Executive Office for Administration and Finance, as well as the legislature for working with us to provide a more stable financial footing for the new Massachusetts DOT.”
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Patrick administration avoids swaptions disaster
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stomv says
as I didn’t like the “financial” part of my “financial and industrial mathematics” masters degree program so much.
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p>But, here’s my tin-foil hat question: is it possible that the swaptions were put in place to de facto require that the state improve the financial standing of the Turnpike Authority at the (now) later date?
bob-neer says
How much is the state still paying to UBS for these swaptions? What is the net balance of payments made to UBS and payments received from UBS under these agreements, including all costs and any other fees and payments associated with the agreements, since they started. What role did the Republican administrations of Cellucci and Swift play in these deals, if any. In short, what has the Turnpike Authority accomplished for the Commonwealth, if anything, by entering into these agreements in the first place? If anyone knows, please chip in in the comments, arr.
pbrane says
I’m pretty sure what has been “avoided” by this settlement is the acceleration of the future obligations of the commonwealth under these agreements into a current lump sum payment. The acceleration payment being the present value of the future payments owed to UBS (which we still owe). There are two reasons that I can see why striking this agreement has value to the state:
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p>1) It avoids the need to fund a large payment at a time when the budget is in disarray.
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p>2) I believe that today’s historically low interest rate environment causes the present value of the future payments to be extremely high. If interest rates increase going forward future payments owed under the swaps will decrease. Given the current level of interest rates there is a much greater chance that they will increase vs. decrease over the remaining term of the swaps so more likely than not the state will be better off making the periodic payments over the remaining term of the swaps rather than a lump sum payment today.
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p>We absolutely need to answer the basic questions of why these contracts were entered into and who was involved.
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p>Also if I’m reading the email post correctly, this would appear to be a temporary reprieve since it came about based upon an increase in the bond rating of MTA debt. I would guess that future decreases in such ratings could put us right back in the soup.
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david says
that the swaptions agreements were a terrible idea, and that they have cost (and will continue to cost) the Commonwealth a good deal of money. This deal avoids an up-front termination payment, as Pbrane correctly notes.
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p>Previous discussions I think pretty well established that back in the late 1990s and early 2000s, the Pike (1) was running seriously low on cash and was looking for any possible way of raising a few quick bucks without having to hike the tolls yet again; (2) was brought an enticing deal by employees of Lehman and UBS, at least one of whom was a former House Ways & Means chair; and (3) really had no idea what they were getting themselves into.
stomv says
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p> …but I do know that the first part of your statement doesn’t imply the second.
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p>If the state got a deal where we could but $50M on the roll of a fair die*, and got paid even money on a roll of 3, 4, 5, of 6 then it’d be a fantastic idea to place the bet. If we rolled a 1 or 2, we’d be out $50M and be cursing our luck, but that wouldn’t make it a terrible idea.
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p>Conversely, if we had to roll a 5 or 6 to get paid even money, it’d be a terrible idea even if we got lucky and rolled that 5 or 6.
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p>Bottom line: I don’t know if the expected value of the transaction was actually positive or negative, or what that distribution looked like. The downside is certainly far down, but what was the upside, and what were the chances? Unless we know that, it’s hard to know if the swaption as financial tool was a bet like the first one I described or like the second one.
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p> * singular of dice
pbrane says
I don’t think its clear that these were bad trades from the get-go (they may have been, but I haven’t seen anyone argue the point and I haven’t spent the time it would take to form my own opinion based on the terms of the deals).
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p>I think it is fair to debate whether it is ever appropriate for the state (or any government) to get involved in these type of deals:
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p>- Does the government have the resources to adequately assess the risks of such dealings?
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p>- Are these trades consistent with its overall appetite for risk?
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p>- Given the fragile nature of the state budget process, is the potential upside of the trades worth the incredibly disruptive effects we almost felt from the downside?
david says
I think it’s pretty clear that the Turnpike did not have the expertise to assess what it was getting itself into.
petr says
Remember that this was part of a parcel of ‘offsetting’ deals with UBS and Lehman Bros…. and the only reason we know about is because of the Lehman demise. I don’t have time to search the archives right now, but I recall some serious questions of collusion and a lack of clarity about just who had initiated the conversations about the swaptions…
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p>If Lehman were still around, I daresay the shell game would still be going on…