T Begins Execution on Debt Strategy Forecast to save $235M

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BOSTON – May 9, 2016 – In the first step of executing a comprehensive debt restructuring strategy, the MassDOT board and MBTA Fiscal and Management Control Board (FMCB) both voted unanimously today to terminate five legacy floating-to-fixed rate interest swaps which were forecast to cost the MBTA more than $100M in excess interest payments over the next 10 years.

By refinancing its high-rate interest swap and fixed-rate bond holdings, money saved over the long-term can be spent on capital investment and strengthening the MBTA's balance sheet.

Through comprehensive debt restructuring of both its fixed and variable rate debt to take advantage of historically low interest rates, the MBTA would realize savings of more than $235 million over the next decade. Like a family that refinances its home mortgage at a lower rate to allow for greater spending on other priorities, these savings allow the MBTA to create future debt capacity that would enable investment in key capital projects to improve the system.

"It is a very conservative approach," MassDOT Committee on Finance and Audit Chair Betsy Taylor said in support of the proposal during a presentation before the committee.

MBTA Chief Administrator Brian Shortsleeve outlined the debt strategy in a presentation Monday to the FMCB. A swap is a contract where two financial parties exchange interest rates, and is used to hedge against market volatility. Currently the MBTA holds a number of swaps from the mid-2000s that are costing tens-of-millions of dollars per year in interest above current market rates.

"By taking action today, we better position the MBTA to serve its customers in the future by putting the MBTA balance sheet on a more sustainable path," said Shortsleeve. "Unwinding bad trades is never easy. However, by addressing the issue head-on, the T is forecast to save more than $100 million in swap payments over the next decade."

If no action was taken, the swaps would continue to cost the MBTA tens-of-millions of dollars per year and future MBTA boards will be limited in their ability to make the borrowing and fiscal investment decisions for the agency. Today's action ensures that future MBTA boards and T management teams will not be hindered by legacy swap payments and will have maximum flexibility to finance growth capital investments that can enhance MBTA infrastructure and the experience of our riders.

The MBTA's debt portfolio has a total of $5.2 billion of long-term current outstanding debt, of which $4.6 billion are fixed rate bonds. $542M of the MBTA debt is variable rate, and this debt is hedged through eight legacy floating-to-fixed interest rate swaps that hedge underlying variable-rate debt from the 2000s. These swaps will be terminated at a discount to their market value through cash payments. The MBTA will also refund existing fixed-rate bonds for interest rate savings through a competitive market process designed to ensure that the MBTA captures the best market interest rate.