Local
Metro trying to stop Belgian bank from collecting $25 milion
By: Taryn Luntz
Examiner Staff Writer
October 30, 2008
Metro has requested a temporary restraining order in federal court against a Belgian bank that is forcing Metro to pay $25 million by the end of the week because of a technicality in a financial deal.
Without federal intervention or a court-granted restraining order, the cash-strapped transit agency will be forced to make the payment using money from its 2009 capital budget, which would hurt its ability to pay for new equipment, or risk defaulting on the payment and facing a downgraded credit rating that would hurt its ability to finance future projects.
Metro officials asked the Treasury Department Tuesday for help and filed the restraining order against KBC Bank Wednesday.
The deal is one of hundreds made by 31 transit agencies now in trouble after insurers such as American International Group (AIG), which backed Metro’s deals, lost their high credit ratings amid the economic crisis.
The deal terms require the insurers to maintain a AAA credit rating.
Berkshire Hathaway, which owns several insurers and has a AAA rating, has agreed to insure Metro’s deal for the next five years, but the bank rejected the proposal, Metro spokeswoman Candace Smith said.
Between 1997 and 2003, AIG insured $1.6 billion worth of deals in which Metro sold its railcars to banks and leased the cars back at low interest rates, generally over a 30-year term.
Metro made 16 of the deals; it would owe $400 million if all of the banks terminated the agreements.
The deals worked for Metro because when the banks bought the railcars, they gave the transit agency a total of $100 million to invest in capital improvements such as track rehabilitation and equipment purchases.
The deals worked for the banks because they could claim large tax deductions for owning the equipment, in addition to recouping all of their money plus interest. But the Internal Revenue Service eliminated the banks’ tax shelters in 2004 and is offering them a 20 percent tax deduction for ending the lease deals this year.
The downgrading of insurers’ credit ratings is giving banks a way to get out of the deals and take advantage of the IRS offer. Transit agencies nationwide are asking the Treasury Department to guarantee the deals.
Without federal intervention or a court-granted restraining order, the cash-strapped transit agency will be forced to make the payment using money from its 2009 capital budget, which would hurt its ability to pay for new equipment, or risk defaulting on the payment and facing a downgraded credit rating that would hurt its ability to finance future projects.
Metro officials asked the Treasury Department Tuesday for help and filed the restraining order against KBC Bank Wednesday.
The deal is one of hundreds made by 31 transit agencies now in trouble after insurers such as American International Group (AIG), which backed Metro’s deals, lost their high credit ratings amid the economic crisis.
The deal terms require the insurers to maintain a AAA credit rating.
Berkshire Hathaway, which owns several insurers and has a AAA rating, has agreed to insure Metro’s deal for the next five years, but the bank rejected the proposal, Metro spokeswoman Candace Smith said.
Between 1997 and 2003, AIG insured $1.6 billion worth of deals in which Metro sold its railcars to banks and leased the cars back at low interest rates, generally over a 30-year term.
Metro made 16 of the deals; it would owe $400 million if all of the banks terminated the agreements.
The deals worked for Metro because when the banks bought the railcars, they gave the transit agency a total of $100 million to invest in capital improvements such as track rehabilitation and equipment purchases.
The deals worked for the banks because they could claim large tax deductions for owning the equipment, in addition to recouping all of their money plus interest. But the Internal Revenue Service eliminated the banks’ tax shelters in 2004 and is offering them a 20 percent tax deduction for ending the lease deals this year.
The downgrading of insurers’ credit ratings is giving banks a way to get out of the deals and take advantage of the IRS offer. Transit agencies nationwide are asking the Treasury Department to guarantee the deals.
