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By João-Pierre Ruth
Long-term leaseback agreements signed as far back as the 1990s by NJ Transit and other public transit systems gave these agencies much-needed liquidity, but a technicality allows banks funding the agreements to immediately demand compensation even if the transit agencies have not missed a payment.
When AIG and other guarantors lost their top ratings in the wake of the economy’s fallout, the door opened for banks to collect, which prompted federal legislation to keep banks from bleeding the transit agencies dry.
“The American people were asked to bail out some of the nation’s banking titans,” said U.S. Rep. Bill Pascrell Jr. (D-Paterson). “If transportation agencies like NJ Transit are forced to pay banks the dollars they lost due to a change in the tax law, who knows how that could affect the quality of our bridges, tunnels and other parts of our transit system?”
In a typical leaseback agreement, property is sold to a buyer, who then immediately leases it back to the seller. These leasebacks put ownership of buses, trains and rail lines in the hands of banks, but the agreements technically lapse into default if the guarantors lose their AAA rating, with the transit agencies left holding the bag. NJ Transit said it faces some $150 million in exposure under its agreements.
U.S. Sen. Robert Menendez (D-Hoboken) introduced a bill in June that seeks to levy a 100 percent excise tax on certain proceeds collected by banks through such contracts. Pascrell is a co-sponsor of the House version, which is under committee review.
Virginia Miller, senior manager of media relations with the American Public Transportation Association, said up until 2003, the Federal Transit Administration promoted and approved of agencies entering into leasing agreements such as Sale-In/Lease-Out, and Lease-In/Lease-Out. APTA, in Washington, D.C., is an advocate for the public transportation industry.
“It was an arrangement seen by the Federal Transit Administration as a win for the company that got the tax write-off and for the public transit system who received the revenue,” Miller said. At the end of the lease, the transit systems would reclaim ownership of the buses, rails and trains.
In order to get FTA approval, the transit systems were required to establish accounts with highly rated insurers to guarantee the lease payments. “Most of these accounts were on deposit with AIG,” Miller said. Other insurers backing transit systems include Financial Security Assurance and Ambac Financial Group Inc.
Though the agreements provided agencies with money for capital projects, Congress later deemed them tax-avoidance schemes that benefited banks. The deals were stopped in 2003 and, last year, the Internal Revenue Service proposed a settlement of the leases to eliminate future tax benefits while keeping existing deals in place.
In 2008 and 2009, some of the guarantors of SILO/LILO agreements saw their ratings lowered from AAA, triggering the default clauses. Transit agencies fear if lenders exploit this technicality, money needed for transit upgrades would be siphoned away.
Menendez said in a letter to House Majority leader Steny Hoyer (D-Maryland) that he believes legislation is needed to stop banks from gaining “a windfall from the current economic climate” that would put the agencies at risk.
In addition to NJ Transit, Miller said the leaseback agreements affect 30 of the nation’s largest transit systems, which collectively face more than $2 billion of exposure — money those agencies do not have on hand.
“The systems were paying on time what they owed,” she said. “For something that had been spread out through the years, they were supposed to come up with the money right away.”
E-mail to jpruth@njbiz.com
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