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To: ldo79 who wrote (358358)	2/19/2008 3:35:12 PM
From: LTK007	Read Replies (1) \| Respond to of 436258

Massachusetts May Raise Tolls Amid Auction-Rate Woes (Update2) By Michael McDonald Feb. 19 (Bloomberg) -- Drivers on the Massachusetts Turnpike may face higher tolls after the state couldn't sell auction-rate securities backed by a unit of Ambac Financial Group Inc. The Massachusetts Turnpike Authority, the state agency overseeing Boston's ``Big Dig,'' is spending an additional $300,000 a month because of its failed transaction involving $126.7 million of the Ambac-backed securities, state officials said today. A prolonged delay could upset efforts to cut agency costs and avoid raising tolls later this year, officials said. ``That is a very significant financial obligation, probably our biggest short-term problem,'' Alan LeBovidge, the turnpike authority's executive director, said at the state agency's monthly board meeting today. The turnpike paid Ambac $6 million seven years ago for a bond insurance policy that it planned to use in the future to refinance up to $800 million it borrowed for the Big Dig. The authority is now unable to sell $126.7 million in Ambac-backed bonds after the insurer's credit rating fell because of subprime-related debt it guaranteed, LeBovidge said. Additionally, the market for auction-rate debt has been roiled by bankers' reluctance to stand behind those bonds and buy them for their own accounts, causing auctions to fail. The delay costs the turnpike an additional $300,000 a month because the $126.7 million in bonds are tied to an interest-rate swap with UBS AG that began in January. Officials are trying to rework the arrangement with different variable-rate securities to match the terms of the swap contract. Interest-Rate Swaps Interest-rate swaps are a type of financial derivative in which two parties agree to exchange payments tied to a bond, typically a fixed-rate payment for one that varies based on changes in a benchmark or other measure. Auction-rate bonds are long-term debt with interest rates that reset according to bids submitted through securities firms every seven, 28 or 35 days. When there aren't enough bids, the auction fails. Until the past two weeks, bankers who ran auctions prevented failures by purchasing bonds for their own account, though they weren't required to do so. Investors grew wary of relying on bankers to support auctions as the investment firms reported more than $146 billion of credit losses and writedowns. `Sort Itself Out' The market for insured municipal bonds is ``trying to sort itself out,'' said Robert Rich, a transportation specialist with Public Financial Management in New York, who is advising the turnpike on its bond sale. The turnpike's ``past financial transactions'' could derail Governor Deval Patrick's effort to cut costs at the authority and avoid raising tolls again this year, according to LeBovidge, who was hired in November. The state agency used interest-rate swaps to balance its budget over the last eight years, taking upfront payments and in exchange giving investment banks such as Zurich-based UBS options on swaps tied to $2.2 billion it borrowed to help finance the construction of the Big Dig highway tunnels. UBS exercised an option on a $126.7 million interest-rate swap last year, triggering an exchange of payments that began in January and lasts until 2039. Bankers can exercise an option on another swap with the turnpike next month, Rich told the board. UBS Transaction UBS is paying the state agency an interest rate equal to 68 percent of the London interbank offered rate on the $126.7 million, which is about $300,000 less than the agency needs to cover the cost of the outstanding fixed-rate bonds, according to calculations Rich presented to the board. The turnpike was planning to match the rate it gets from UBS by selling $126.7 million in Ambac-insured auction-rate securities, Rich said. Now, it is trying to buy a letter of credit from State Street Bank and Trust Co. and KBC Group NV so it can sell variable-rate demand obligations by mid-March, he said. Moody's Investors Service in November put the turnpike authority under review for a downgrade because the agency's costs are rising faster than its revenue. It rates the turnpike's senior bonds A3 and subordinate bonds Baa1. The turnpike faces a $35 million budget shortfall this year and was planning to close $17 million of that deficit by refinancing Big Dig bonds at lower rates. Bernard Cohen, the governor's transportation secretary and turnpike board chairman, said the agency will raise tolls if it can't achieve those savings. To contact the reporter on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net Last Updated: February 19, 2008 15:15 EST