Columbia serves as sole financial advisor to Metro/Bi-State Development District, the public transit authority (bus and light rail) for the St. Louis, Missouri metropolitan area. Over recent years, the Agency suffered significantly from the fall-out of the global credit crisis. Metro braced itself for the combined impacts of a significant operating deficit for FY2008, coupled with the first principal maturities due on its $313 million Series 2002B Bonds. Expecting a vote in 2008 for sales tax extension that would resolve the then current fiscal crisis, Metro desired to find approaches to allow it to survive FY2008 without significantly cutting operations.
In the fall of 2008, the global credit crisis brought Metro a number of challenges. The failure of AIG negatively impacted a number of Metro’s leveraged lease transactions, and FSA’s downgrade by Moody’s impaired its Series 2002A VRDBs, resulting in nearly $80 million in bank bonds. Unusual SIFMA/LIBOR ratios created significant negative marks-to-market on its floating-to-fixed rate swaps, and the Agency’s operations were severely impacted by the failure of a ballot to expand its sales tax revenues.
Columbia worked actively and closely with Metro, its board and its counsel to mitigate rating agency fall-out, prepare a step-wise financial plan to deal with the various financial crises it faced, and to help ensure the long-term sustainability of its debt program.
In 2009 Columbia negotiated with Metro’s liquidity provider, WestLB, to forego a scheduled principal acceleration payment in exchange for Metro’s partial conversion of the VRDBs supported by the agreement. Later in 2009, following an unsuccessful attempt to secure new credit support and/or liquidity for its bonds, Metro refunded the remainder of the debt as fixed rate bonds. At Columbia’s recommendation, Metro decided to refund rather than remarket to avoid restrictive issuance conditions imposed by the indenture, avoid market concerns about the 2002 insurer and to reduce Metro’s exposure to a debt service reserve surety weakened by rating agency actions against the underlying insurance company.
The approach we developed jointly with the Agency allowed it to “buy time” for markets to return more closely to historical norms and in anticipation of funding partner, St. Louis County, scheduling a second sales tax vote. Concurrently, Columbia worked with the Agency to secure approvals from the Illinois and Missouri legislature, and the United States Congress, to allow it to amend its charter to permit the issuance of bonds for up to 40 years (rather than the previous limit of 30 years).
Through Columbia’s comprehensive debt management approach and its close work with the agency, approximately 80% of its outstanding debt was structured with a 2013 call date, creating a pathway for its successfully completed comprehensive debt restructuring in July 2013.
A significant component in the Agency’s overall debt restructuring plan was reaching a successful and mutually beneficial agreement with its funding partner, St. Louis County, as described below.
St. Louis County voters approved a 1/2-cent sales tax in 2010 to be used for public transit operations and for future expansion of the MetroLink light rail system. From the expected $80 million in annual receipts, the County and Metro agreed to an annual split of roughly 60% for Metro operating and 40% for future capital to be held by the County. Neither the County nor Metro expect an expansion of the MetroLink system to occur for at least seven to ten years, resulting in the expected accumulation of very large cash balances from the 40% capital set-aside.
Anticipating a comprehensive restructuring of Metro's outstanding debt in 2013, Columbia Capital developed a proposal where the County would make annual loans to Metro·at sub-market interest rates·from the 40% the County was reserving for capital, with the caveat that Metro would need to repay those loans once a MetroLink expansion were to get underway. Metro would use the proceeds of those loans to call market-rate bonds for redemption each year. The keys to the proposal were threefold: first, Columbia Capital had to demonstrate that the third partner in the MetroLink system, the City of St. Louis, would not be able to block repayment of the loan when demanded by the County; second, that the loan program would be beneficial to both Metro and·the County; and, third, that Metro would have the debt capacity to refinance the loan (presumably with refunding bonds) at the time the County demanded repayment.
The resulting agreement achieved all goals. It:
• Secured repayment of the County loan on a subordinate basis to Metro's comprehensive 2013 restructuring.
• Allowed Metro to repay the County loan without further action by the City of St. Louis Board of Aldermen or the St. Louis County Council.
• Provided for a County repayment demand on any date with one year's notice, but only after July 2018, meaning that Metro would benefit from the County loan program for at least five years.
• Provided for an initial draw of $75 million at closing of Metro's comprehensive 2013 restructuring, allowing Metro to avoid borrowing those funds in the municipal market.
• Provided for a fixed interest rate on each loan draw, established as a spread to a short-term tax-exempt municipal bond index with a cap substantially below the true interest cost on Metro's comprehensive 2013 restructuring. This rate has also been substantially higher than the County's current return on its investment portfolio.
From just the initial $75 million draw, Metro will save more than $2.5 million per year in interest costs. Additional draws of $30 million per year has allowed Metro to redeem $60 million in market-rate bonds with those proceeds, nearly doubling annual debt service savings from this unique partnership.