Washington Delegation Urges Quick Action to Avoid Metro Credit Crisis

WASHINGTON, D.C., October 27, 2008 – All seven members of the Washington-area delegation sent a letter today urging Treasury Secretary Paulson and Federal Reserve Chairman Bernanke to take immediate action to prevent the current credit crisis from bringing Metro to an immediate halt. Metro has until Wednesday to find a solution to a credit crisis facing nearly every transit agency in the country.

The Washington-area delegation stated, “We urge the Treasury act with great speed to address this crisis affecting virtually every transit agency in the country. Metro’s emergency is the first in a wave of problems that must be confronted. How we deal with the situation in our nation’s capital will provide the guidance for how we proceed in dealing with the other 30 transit agencies around the country.” 

The letter, signed by Reps. Moran, Hoyer, Van Hollen, Holmes Norton, Tom Davis, Wolf and Donna Edwards, requests that the U.S. Department of Treasury step in and act as the insurer of last resort for so-called “sale lease-back transactions.” These transactions -- in which transit agencies arranged for banks to purchase their Metro cars who then leased them back to the agencies -- have become insolvent because of the lowering of insurance giant AIG’s credit rating. The sale lease-back arrangements were contingent on the transactions’ insurer maintaining an AAA credit rating.

Some 30 other transit agencies nationwide face similar circumstances. Metro, however, will be the first system tested by this crisis. Metro could face up to $400 million in direct payments to banks on 16 sale-leaseback transactions that were completed and reviewed by the Federal Transit Administration between 1997 to 2003. Metro does not have access to such large amounts of capital in the near term because of the international credit crisis and could face insolvency if forced to pay.

An excerpt from the letter states, “Allowing investors to proceed to default in these transactions would invite financial disaster for state and local public instrumentalities and further disrupt any ability to obtain credit...would cost state and local public instrumentalities hundreds of millions of dollars, would force sharp reductions in transit services in the nation’s largest urban areas; and…would have large repercussions in state and local credit markets…even as these governments confront the bleakest revenue situation in the last half-century.”

The following is the full text of the Delegation’s letter to U.S. Treasury Secretary Hank Paulson and U.S. Federal Reserve Chairman Ben Bernanke:

 
October 27, 2008

 
The Honorable Henry Paulson                          The Honorable Ben Bernanke
Secretary of the Treasury                            Chairman
U.S. Department of the Treasury                      The Federal Reserve
1500 Pennsylvania Avenue, NW                         20th & Constitution Ave., N.W.
Washington, DC 20220                                 Washington, DC 20551

Dear Mr. Secretary and Mr. Chairman:

We are writing to request your urgent consideration and action in response to a potential technical default of the Washington Metropolitan Transit Authority (WMATA) as early as this Wednesday, October 29th.  Absent some immediate relief, there would be two significant problems. The consequences of inaction and an adverse decision could trigger banks to demand technical defaults on some 31 other public transportation authorities serving virtually every major metropolitan area in the United States, which would severely hamper the ability for transit properties to access credit markets. It would create a very distinct possibility of ratings downgrades to below investment grade, which would put the authority in default on many of its existing debt and fuel hedging transactions. These authorities are public instrumentalities created by state and local governments. Funding for these agencies combines resources from the Federal Transit Administration of the U.S. Department of Transportation, farebox revenue paid by transit riders, and state and local government funding. The agencies provide bus, subway, commuter rail, and other transit services.

WMATA and other public transportation agencies funded their payment obligations through the purchase of U.S. Treasury obligations which were entrusted to an equity payment undertaker, such as AIG and others. Each equity payment undertaker becomes, in effect, a private guarantor or insurer of the payment obligations. These private guarantors were required to maintain minimum credit ratings, typically an AAA rating.  The credit rating downgrades experienced by AIG and other similar entities resulted in a series of technical defaults that threaten the financial future of most of the nation’s largest transit agencies, as well as the financial futures of the state and local governments that fund them.

Because of the impacts of the credit freeze on state and local governments and the prohibitive costs of borrowing where any credit has been available, an inability to resolve this issue would have major implications for the country. At least 31 transit properties in 18 states have exposure from entering into the lease-back transactions, according to market sources. Moreover, because these kinds of leaseback transactions are not limited to transit assets, but also include sewage plants, water treatment facilities, government buildings, and other assets; the resolution of the WMATA situation will be critical for a potential surge of a latent flood of technical defaults which could be forthcoming.

In the case of WMATA, the agency could face up to $400 million in payments on 16 sale-leaseback transactions that were completed and reviewed by the Federal Transit Administration between 1997 to 2003, selling rail equipment worth more than $1.6 billion. These contracts required an AAA rated insurer. In most, American International Group (AIG) was the guarantor. Thus, when AIG lost its credit rating, it opened the door for an owner to trigger a technical default. Moreover, there are no guarantors left with an AAA rating, so that whatever precedent is set by WMATA, it is likely to follow for every other major agency in a comparable situation. The public transit sector’s total exposure from these deals, if they are called upon to pay investors, ranges from $1.5 billion to $4 billion. We are concerned that as you confront this unprecedented credit situation, you recognize that serious problems are not inherent only to the banking and financial sector, but also to state and local governments.

In the case of WMATA, AIG provided a guarantee behind the agency’s lease payments to its counterparties on many of the transactions, but in most cases the terms required AIG only to post collateral in the event of a downgrade. In our view, since we believe that the investors’ overall risk exposure might, in fact, be better today than it was at the beginning of the transaction and even though the investors’ positions are secure; nevertheless, the AIG downgrades still san trigger contractual language, triggering for the investors the right to make certain draws to reimburse themselves for lost federal tax benefits. The alternative, moreover, of trying to replace AIG as a GIC or credit provider is nearly impossible, especially since all the agencies involved in leaseback deals with AIG are trying to do so at the same time.

While we appreciate that most of the banks which own WMATA equipment have been providing or considering WMATA waivers in order to provide the agency with an opportunity to develop solutions, we are deeply concerned that one bank has not, and that bank has advised WMATA that the agency would have to make a $43 million termination payment by this week.

Allowing investors to proceed to default in these transactions would invite financial disaster for state and local public instrumentalities and further disrupt any ability to obtain credit. A purely technical default, involving a party such as AIG which has been the recipient of considerable assistance through the Treasury, would cost state and local public instrumentalities hundreds of millions of dollars, would force sharp reductions in transit services in the nation’s largest urban areas; and any default would have large repercussions in state and local credit markets, forcing much greater difficulty in securing any access, even as these governments confront the bleakest revenue situation in the last half century.

We urge your action to address this issue, including requesting Treasury’s authority under the Emergency Economic Stabilization Act to assume AIG’s role as the guarantor in these transactions in addition to meeting with representatives of WMATA at your earliest availability. You have both demonstrated enormous ability to react and innovate in these unprecedented times. We hope you will respond in similar fashion in this instance.

Sincerely,

Steny H. Hoyer                     James P. Moran            Thomas M. Davis III
Member of Congress                 Member of Congress        Member of Congress

 
Chris Van Hollen, Jr.              Donna F. Edwards          Eleanor Holmes Norton
Member of Congress                 Member of Congress        Member of Congress

 
Frank Wolf
Member of Congress

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