Q&A with FTA's James Simpson

TARC provides a Ride to Safety

The Washington Metropolitan Transit Authority (WMATA) appeared Nov. 12 in U.S. District Court along with a Belgian bank to determine whether the bank can demand $43 million immediately from the agency and its guarantors. 

WMATA officials have asked the Treasury Department to intervene and for Secretary Henry M. Paulson, Jr. to take immediate action to protect the 1.2 million riders who take Metrorail, Metrobus, and Metro Access every day.  They have also asked a federal judge to temporarily bar the bank, KBC Group of Belgium, from collecting a $43 million payment.  The bank is demanding this money because its long-term lease agreement with Metro has fallen into a technical default – a direct consequence of the global credit crisis.

Transit agencies and other public entities across the country are watching this hearing intently, because many of them entered in similar deals years ago.  Because of the recent credit downgrading of the American International Group (AIG), these systems are also in danger of default.  More than 30 transit agencies could face $2 billion in payments if their deals go into default, forcing the agencies to take drastic steps that could include cutting service or capital purchases or maintenance, which in turn will radically harm local economies.  

Metro is asking the Treasury Department, which recently agreed to spend more than $700 billion to aid financial institutions, to act as a guarantor for Metro’s financial deals and for similar deals made by 30 other transit agencies nationwide, preventing the banks from demanding immediate full payment.

KBC is demanding the $43 million because of a technicality in a long-term financing deal that allows it to collect all of the money immediately if Metro’s surety loses its AAA credit rating, which is precisely what happened to AIG.  This is a credit rating issue, not a loan default issue.  If forced to default for termination value in this and other transactions, “we may have to pay more than $400 million to the Belgian bank and other banks even though these banks are receiving all of their payments as scheduled,” said WMATA spokesperson Lisa Farbstein.  That $400 million would represent a two-thirds depletion of Metro’s $613 million capital budget for the year.

Also on Nov. 12, officials from nearly 20 transit systems sent a letter to Treasury Secretary Paulson urging him to back the credit ratings of the insurers of long-term leasing agreements.

Metro and KBC reached a settlement Nov. 14 to end a long-term leasing deal after nearly three days of talks in federal court.  "This is a win for the riders of our system and taxpayers of this region," said Metro General Manager John Catoe outside of U.S. District Court.  "Taxpayers have been saved tens of millions of dollars, and Metro no longer faces the immediate threat of cuts to our capital budget and a downgrading of our credit rating."

All parties agreed not to discuss the terms of the settlement. 

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