The deal Metro reached with a Belgian bank this week to settle a dispute over an unraveling lease arrangement still leaves the transit agency in jeopardy from 14 other financial institutions that could also call in their loans.
Nearly three days of closed-door talks between Metro and KBC Group ended with a deal that both sides described as “win-win.” Financial details were not disclosed on the order of U.S. District Court Judge Rosemary Collyer, but Metro officials said the accord means that the system’s capital budget is no longer threatened.
“This is a win for the riders of our system and taxpayers of this region,” Metro General Manager John Catoe said in a statement. “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.”
The complex “lease-back” transaction between Metro and KBC toppled earlier this year as a result of the nationwide financial meltdown and the stunning collapse of American International Group.
Under the six-year-old arrangement, Metro sold 36 railcars to a slate of investors in return for roughly $96 million, $19 million of which came from KBC. KBC then leased the cars back to Metro, collected payments through an interest-bearing trust and deducted the assets through a tax shelter.
AIG guaranteed the trust, and the terms of the deal required the insurer to maintain a AAA bond rating. But AIG collapsed, spurring KBC to default Metro’s loan and demand a $43 million termination payment.
Metro is tied up in 14 other lease-back deals, all of which are in default because of AIG’s collapse. The termination payments for those agreements total a potentially devastating $362 million.
Hundreds of transit and public works agencies are involved in similar leasing arrangements, with potential penalties totaling billions of dollars. Collyer, courtroom observers believed, forced a deal in part to avoid setting a precedent that could send transit systems across the U.S. hurtling into disaster.
“Hallelujah,” the judge reportedly said after announcing a deal was done.
The public entities are looking to the federal reserve to step in for AIG and guarantee the deals. The chief executives of major U.S. transit agencies will ask Congress next week to require the Treasury Department to step in.
“This would be at little to no cost to the federal government, and the transit agencies would no longer be in technical default of the contracts,” Catoe said.
