CEO LeBovidge says "No bailout" as state guarantees $800m of Mass Pike debt

Massachusetts Turnpike chief executive Alan LeBovidge said today the Turnpike has not been bailed out by the state. The term "bailout" has been widely used in reports there to characterize moves to have the state stand behind about $800m of Turnpike debt. LeBovidge told us today: "There hasn't been any bailout." He called the guarantees of Turnpike debt "assistance" by the state to reduce the Turnpike's financing costs. By using the state's AA rating rather than the Turnpike's BBB- bond rating the Turnpike had more options and lower interest costs.

LeBovidge told us: "Actually the Turnpike bailed out the state several years ago when the Turnpike agreed to take over the costs of the Big Dig after the federal government refused to contribute further to cost over-runs. The state came to the Turnpike because the state couldn't find the money needed to complete the Big Dig. You could say we bailed them out."

"An $8 billion project had suddenly become a $15 billion project, to put it at its simplest."

LeBovidge also doesn't like the term "bailout" because, he said, it suggests the Turnpike's financial problems are solved, and they aren't.

"This is important and valuable assistance," he said of the legislature's move, "but we aren't out of the (financial) woods."

"We continue to have a serious negative cash flow. We've still got a tough row to hoe."

"We're in a very large (financial) hole now because we took on a very large debt on behalf of the state. Also parts of the Big Dig are now 12 years old. Maintenance costs are rising. We face operating costs of more than $100m a year on what is essentially a non-tolled project," said LeBovidge.

On top of this there has been financial turbuience - the breakdown in the auction-rate securities markets plus doubts about the solvency of bond insurers.

The Turnpike is looking to refinance or renegotiate variable-interest 'swaption' loans of about $800m with UBS that went bad as the auction rate market collapsed earlier this year. At about the same time the financial condition of bond insurers took a turn for the worse.

Without a refinancing the Turnpike would be up for an extra $2m/month ($25m/year) in interest charges alone.

Second worry is that if the Turnpike's bond insurer Ambac is unable to fulfill its commitments on insurance of the Turnpike debt to UBS, then the Turnpike Authority could be subject to a call for $200m from UBS.

Third the Turnpike which financed $800m of $2.4b of Big Dig debt on interest-only terms and got $70m of upfront cash under a 'swaption' hedging deal will have to start repayment of principal. Those principal repayments begin in 2009 at $30m/year.

LeBovidge says the Turnpike is not "insolvent" because it can raise more revenue by raising toll rates. But it needs to reduce costs and get itself on a more efficient operating basis before it tries to make a case for higher toll rates.

A week ago the Patrick Administration quietly moved to underwrite the whole of the Turnpike's $2.4 billion of debt, and the lower house in the state legislature passed the measure.

However the $2.4b underwrite was loudly denounced by state treasurer Tim Cahill and senate leaders as irresponsible - foisting the problems of the Turnpike on state taxpayers. Support for underwriting $800m of refinancing, rather than the full $2.4b of debt was a compromise agreed to in the small hours of Friday morning as the legislature was going into a summer recess.

COMMENT: A number of other toll authorities did similar complex "innovative finance deals" earlier in the decade that have now gone bad as in Massachusetts. These include the turnpikes in New Jersey, Pennsylvania, and several other states. New Jersey's received a Bond Buyer "Deal of the Year" award that is now rather embarrassing.

Their 'swaption' deals and auction-rate securities fiascos have not received the same political scrutiny as Massachusetts partly because they have larger operating surpluses to cushion the blow.

The Massachusetts Turnpike is unique in having taken on major extra debt without also getting a new source of toll revenue to help service the debt.

Pennsylvania is getting a 25% increase in tolls, and the hope it can toll presently free I-80 across the breadth of the state in return for taking on extra debt in its Act 44 public-public partnership with PennDOT.

In Dallas TX, NTTA gets to toll SH121 in return for its extra debt.

In Massachusetts there was the notion that toll payers on the existing Turnpike (I-90) plus the harbor tunnels would pay higher tolls to carry the Big Dig as a mostly free facility. The improvement to I-93 (the Thomas P O'Neill Tunnel and Zakim Bridge) is providing a beautiful free ride to a couple of hundred thousand motorists every day but it cost billions.

They still haven't worked out a sustainable funding mechanism for it.

TOLLROADSnews 2008-08-01