Bad deal on bonds costs Port Authority $39.2M
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The Port Authority this week paid a bank $39.2 million to escape from a bond deal it entered seven years ago that turned out sour.
The payment to Bank of America Merrill Lynch canceled a complicated and risky transaction called an interest-rate "swaption" that the authority agreed to in 2004, partly to reap a $9.5 million upfront windfall.
The payment was part of a $263.3 million refinancing bond issue that the authority completed on Tuesday. The cost of the payment will be spread over Port Authority budgets starting next year and continuing to 2029, adding $2.3 million in debt service expense per year, authority officials said.
Because the authority pays debt service from its capital budget, the added cost will not impact operations or require service cuts, spokesman Jim Ritchie said. But it will reduce the amount available for longer-term projects such as bridge, busway and rail reconstruction.
"It's essentially a refinancing. We're trying to get out of an arrangement that was putting us in greater financial jeopardy," he said.
The authority agreed to the swaption deal with Merrill Lynch in 2004, during the administration of CEO Paul Skoutelas. Bank of America bought Merrill Lynch in 2008.
Ellen McLean, the current chief financial officer, who joined the authority last October, said the swaption deal enabled the agency to cash in on anticipated future savings from debt refinancing. But it also exposed the authority to risks based on interest-rate fluctuation.
The collapse of the credit markets in 2008 and 2009 drove down rates and left the authority's side of the swap at a considerably lower value than what it would be paying out.
It also gave Merrill Lynch the option to convert the authority's debt to a variable interest rate starting March 1, she said. "What we knew was the volatility in the market would create such a difficulty in budgeting ... it was impossible to budget for.
First Published February 17, 2011 12:00 am
