Delaware River Agency Rethinks Stalling Toll Increase Over Swaps Penalty
The Delaware River Port Authority, operator of bridges and a rail line between Philadelphia and New Jersey, backed away from delaying a $1 toll increase until 2012 because of concern that waiting would trigger a $240 million termination payment on interest-rate swaps.
Authority members this week put off deciding on a resolution that would have postponed until July 2012 a July 1 rise in the levy on the four Delaware River bridges the group manages. John Hanson, the agency’s chief financial officer, said changing the toll schedule may prompt a downgrade by ratings firms including Moody’s Investors Service, which in March put a negative outlook on the authority’s A3 score, its fourth-lowest investment grade.
A downgrade would force the authority to pay Zurich-based UBS AG a $240 million early termination fee on a series of interest-rate swaps designed to cut the agency’s borrowing costs, Hanson told board members during a public meeting in Pennsauken, New Jersey, Nov. 17.
“If we are downgraded we would be in default under the agreement,” Hanson said. He said the $240 million termination payment “would totally exhaust our general fund.”
In a swap transaction, two parties exchange payments, typically a floating one for a fixed. Earlier this decade state and local governments sold variable-rate bonds and negotiated with banks to leave them paying fixed interest that was lower than prevailing municipal rates.
The agency issued $308 million debt in July, paying a yield of 5.09 percent on the 30-year maturity, or about 0.94 percentage point above a Bloomberg valuation index. Hanson said a downgrade based on a change in the schedule for toll increases may make it impossible to get credit at all.
“In addition to the lower rating for the bonds there’s even a question whether or not we would be able to get into the bond market,” he said.
Since 2008, banks have collected more than $4 billion in swaps termination fees from hundreds of borrowers, including Harvard University and the State of New Jersey, according to data compiled by Bloomberg.
The Camden, New Jersey-based authority paid $47 million to terminate swaps with Lehman Brothers Holdings Inc. and UBS since 2008, according to annual financial statements and bond documents.
The July 1 increase from $4 to $5 for passenger cars would raise about $51 million, according to the resolution. DRPA members had hoped to use unspent funds in a series of economic development accounts to replace the one year of toll revenue that would be lost by postponing the increase.
The proposal is now scheduled to be considered by the agency’s finance committee, which hasn’t yet added it to the agenda for its next session, on Dec. 1, Ed Kasuba, a DRPA spokesman, said in a telephone interview today.
“I think we have to find a way to postpone the tolls,” said Jeffrey Nash, a New Jersey appointee who is the authority’s vice-chairman and head of the finance committee.
Pennsylvania appointee John Dougherty, an electrical workers’ union officer who sponsored the resolution delaying the rise in tolls, said he’s still committed to pushing back the increase.
“We’ve put a lot of emphasis on worrying about the bond rating,” he said. “We should spend as much time worrying about the people and the tolls.”
To contact the editor responsible for this story: Mark Tannenbaum in New York at mtannen@@bloomberg.net.