(Bloomberg Opinion) -- New York’s Metropolitan Transportation Authority has a lot of problems, but bankruptcy isn’t one of them.
That’s not because the MTA couldn’t use the debt relief. Far from it: The agency has more than $40 billion of municipal bonds outstanding, borrowed $1.1 billion in early May to pay down maturing notes, issued an additional $525 million two weeks later for infrastructure needs, secured a $950 million credit agreement with JPMorgan Chase & Co. and Bank of China, and won approval to tap the Federal Reserve’s emergency liquidity facility. Debt is as much a part of the lifeblood of the nation’s largest public transit system as the subway tunnels themselves.
Rather, the MTA is legally barred from filing for bankruptcy. This doesn’t get discussed much — perhaps to avoid evoking New York City’s own brush with insolvency in the 1970s. For instance, neither Moody’s Investors Service nor S&P Global Ratings mentioned the word “bankruptcy” in reports this year explaining why they downgraded the agency’s debt. Fitch Ratings, which gives the MTA a higher grade than its two competitors, also cut the MTA’s rating after the Covid-19 pandemic roiled the New York metropolitan area. But it specifically cites the lack of bankruptcy risk as a key strength.
Here’s the provision in full, from a recent MTA bond sale:
No Bankruptcy. State law specifically prohibits MTA, its Transit System affiliates, its Commuter System subsidiaries or MTA Bus from filing a bankruptcy petition under Chapter 9 of the U.S. Federal Bankruptcy Code. As long as any Transportation Revenue Bonds are outstanding, the State has covenanted not to change the law to permit MTA or its affiliates or subsidiaries to file such a petition. Chapter 9 does not provide authority for creditors to file involuntary bankruptcy proceedings against MTA or other Related Entities.
“We’re very clear that their legal structure and their inability to file for bankruptcy protection is an important criteria,” Michael Rinaldi, Fitch’s lead analyst on the MTA, told me in a phone interview. “Absent that protection, it would have an adverse ramification for how we view the MTA’s financial leverage, which is quite substantial.”
Or as I’d put it: If the MTA could file for bankruptcy, the move couldn’t be ruled out.
To be clear, the MTA is hardly out of options, even though it faces a potential $10.3 billion deficit through 2021. As I wrote in April, the agency’s leaders know public transit is vital to moving people around the New York City area, which accounts for almost 10% of the nation’s gross domestic product, and have successfully used that as leverage to secure federal funds. However, it’s burning through that money fast: It has about $1 billion remaining of the $3.8 billion that Congress approved to help cover the sharp drop in ridership and the cost of extra cleaning and disinfecting. MTA officials say they need $3.9 billion more.
There’s every reason to expect it’ll get those funds — Congress isn’t about to repeat Gerald Ford’s “drop dead” moment by denying federal aid. But digging deeper into the MTA’s operating framework, it’s clear that the coronavirus pandemic has set the agency back in such a way that it’ll have no choice but to rely on federal help and more debt for the foreseeable future. That’s probably enough to scrape by, but it raises doubts about whether the MTA will ever have enough cash to truly revitalize the system’s aging infrastructure.
The MTA borrows under something known as the “Transportation Resolution,” which allows it to issue additional bonds without meeting any specific debt-service-coverage level as long as the securities are used to fund approved capital projects and the MTA certifies to meeting a “rate covenant” for the year the bonds are sold.
This is the rate covenant:
MTA must fix the transit and commuter fares and other charges and fees to be sufficient, together with other money legally available or expected to be available, including from government subsidies — to pay the debt service on all the Transportation Revenue Bonds; to pay any Parity Debt; to pay any Subordinated Indebtedness and amounts due on any Subordinated Contract Obligations; and to pay, when due, all operating and maintenance expenses and other obligations of its transit and commuter affiliates and subsidiaries.
Take note of the “including government subsidies” clause. As the MTA eventually explains, it’s the entire game:
The Transit, Commuter and MTA Bus Systems have depended, and are expected to continue to depend, upon government subsidies to meet capital and operating needs. Thus, although MTA is legally obligated by the Transportation Resolution’s rate covenant to raise fares sufficiently to cover all capital and operating costs, there can be no assurance that there is any level at which Transit, Commuter and MTA Bus Systems fares alone would produce revenues sufficient to comply with the rate covenant.
That puts all the cards on the table. Notably, this language is based on the MTA’s adopted budget from February, before any Covid-19 impacts were even considered. In April, ridership compared with a year earlier fell 92% on MTA subways, 94% on the Metro-North Railroad and 97% on the Long Island Rail Road.
Clearly, either the federal, state or city government (or all three) will have to pay up. The MTA alone has no chance of raising enough money itself to satisfy the rate covenant. If it doesn’t get aid, it can’t issue more bonds and would most likely have to slash operating expenses. And if the MTA can’t borrow, there’s no money to finance infrastructure projects. This is the domino effect that has halted the agency’s $51.5 billion five-year capital program.
“This is a four-alarm fire,” Pat Foye, the MTA’s chief executive officer, said last week. “We are facing the most acute financial crisis in the history of the MTA.”
Bloomberg News’s Michelle Kaske reported that the MTA was set to spend $13.5 billion this year for infrastructure upgrades, but the agency has awarded only $2.3 billion. Without federal aid, it may need to freeze wages, fire workers and divert more money from the capital budget. Foye said he would ask the U.S. government for more cash in 2021.
To some extent, “every mass transit system needs to be subsidized,” says Howard Cure, head of municipal research at Evercore Wealth Management. For the MTA in particular, “it’s almost a thought of too big to fail. The New York metropolitan area cannot function without a strong transportation system. They need access to the capital markets — you cannot let the system deteriorate.”
Yet the MTA will be hard pressed to squeeze more money out of the city, which itself is considering 22,000 layoffs and furloughs to cut $1 billion of expenses. At the state level, some studies suggest tax revenue could tumble by 40%, the most in the nation. In theory, both the state and city can require the MTA to redeem its bonds as long as they provide sufficient funds.(1) If that didn’t happen during good economic times, though, it’s not happening now. If push came to shove, Cure says, the state could move to backstop the MTA’s borrowing with its own credit rating, just one step below triple-A. That would presumably lower borrowing costs and provide some budgetary flexibility.
All that is to say, the MTA will have to subsist on federal payments throughout the coronavirus crisis, with perhaps some short-term financing from the Fed sprinkled in. Without question, the U.S. government should do more to help support state and local governments, including public transit agencies, through this economic downturn. Congress will likely provide at least some aid in its next relief package, and the MTA will probably get what it wants again.
Still, it’s tough to project the MTA’s financial situation over the next several years and come up with a scenario in which the agency does any better than muddle through. More than likely, it will continue to lean heavily on government assistance while maxing out its debt. Maybe that’s a better alternative than bankruptcy and the stigma that comes with it, or maybe not. Regardless, New Yorkers can only hope there’s some money for much-needed infrastructure improvements without huge fare hikes.
(1) See Article IV: Redemption at Demand of the State or the City. Except as otherwise provided pursuant to a Supplemental Resolution, either the State or the City may, upon furnishing sufficient funds therefor, require the Issuer to redeem all or any portion of the Obligations as provided in the Issuer Act.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.
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