Metro urged a federal judge Wednesday to temporarily block a Belgian bank’s attempt to declare the transit agency in default of a loan and collect a $43 million windfall, arguing the payment could devastate the transit system and others across the country.
U.S. District Court Judge Rosemary Collyer did not issue a ruling Wednesday on the preliminary injunction request, instead urging Metro and KBC Group to negotiate a settlement. The parties will return to court today.
The transaction between Metro and KBC Group unraveled earlier this year after the collapse of American International Group, which insured the deal. Under the terms of the 6-year-old arrangement, Metro sold three dozen rail cars to KBC in return for about $19 million up front. KBC in return leases the cars to Metro, collects regular payments through a trust, and writes off the rail cars as a major tax deduction.
AIG insured the trust; the terms of the loan required AIG to maintain a AAA bond rating. When the insurer was downgraded by Wall Street, KBC defaulted Metro’s loan and demanded the $43 million termination payment it was owed under the terms of the deal. Roughly $17 million would be pulled from the trust, and the remaining $25 million from Metro’s cash-strapped budget.
A potential scenario for a negotiated settlement could have KBC taking the $17 million in the trust and walking away.
Carol Kissal, Metro’s chief financial officer, told Collyer that the $25 million would deplete the agency’s capital funds. Worse yet, she said: Metro has 14 similar deals with other banks. Without help from the courts, the other financial institutions could demand their $362 million in total termination payments.
“It’s inconceivable to figure out the damage that would probably produce,” Kissal said. “It’s almost a perfect storm that we had not anticipated.”
Metro’s lawyers attempted to frame KBC as a greedy institution intent on collecting a windfall payment in the midst of a historic economic crisis even if it means destroying the area’s critical transit network.
KBC attorney Mark Nagle, meanwhile, argued that two perfectly capable organizations entered into a legal contract in 2002 and the matter of default is “purely a question of law.”
“There’s no guarantee that Metro will honor its obligation,” said Tim Lee, KBC director. “There’s a real risk here.”
The collapse of the credit market has made it nearly impossible to find a AAA-rated insurer to take the place of AIG in the transaction, Metro leaders said. There are negotiations ongoing with the federal government to back the loans, Kissal said, but so far nothing has come of those talks.
Transit agencies nationwide are watching Metro’s case closely. At least 30 systems, including Los Angeles, Atlanta and New Jersey, are in a similarly tight spot.
