Bloomberg News

Port Authority to Pay $63 Million as BNP Unwinds Rate Swaps

March 09, 2012

BNP Paribas SA (BNP), France’s largest bank, has notified the Port Authority of New York and New Jersey that it intends to unwind an interest-rate swap next month that would cost the agency about $63 million.

The swap is one of three contracts the Port Authority entered into in 2006 with Paris-based BNP, the Royal Bank of Canada and Dexia SA (DEXB) to lock in borrowing costs on $647.2 million of debt it planned to issue the following year and 2008. The financial crisis prevented the agency from issuing $423 million of the debt and forced it to refinance another $224 million.

Even so, the Port Authority has paid the banks $53.6 million on the three swaps through March 1.

The deals were part of a “legacy of past mismanagement,” Executive Director Pat Foye and Deputy Executive Director Bill Baroni said today in an e-mail statement.

“These mistakes are now forcing us to deal with the costs of unwinding these risky deals,” the officials said. “We are committed to aggressive action to ensure that this agency does not enter into such speculative deals in the future.”

An audit commissioned by the Port Authority and released last month found a “challenged and dysfunctional organization” that needs a total overhaul because of poor management and a lack of cost controls. The net cost of the agency’s redevelopment of the World Trade Center has climbed to $7.7 billion from $6 billion. The Port Authority also operates the region’s three major airports, marine terminals, PATH trains and bridges between New York and New Jersey.

Swap Fees

The Port Authority’s potential liability for swaps payments was reported earlier this week by the PolitickerNJ website.

U.S. states, cities and nonprofit organizations have spent more than $4 billion ending swap agreements since 2008, paying exit fees to Wall Street banks that sold the derivatives as a way to lower interest costs on long-term debt.

In an interest-rate swap, two parties agree to exchange payments over a period of time based on an amount of debt.

The derivatives were typically sold to municipalities to guard against the risk they took by borrowing with floating-rate bonds whose interest rates fluctuated along with the market. Under such contracts, municipalities received a variable payment, meant to cover those on the bonds, and paid a fixed sum in return.

That method was sold as a way to provide lower borrowing costs than were available through the sale of fixed-rate bonds.

Toll Revenue

Ron Marsico, a Port Authority spokesman, said the termination fee, which could change bases on interest rates, would be made from the agency’s $1 billion consolidated bond reserve fund.

A $63 million payment to BNP would be about $4 million less than what the Port Authority has budgeted to operate the Holland Tunnel this year, according to the agency’s preliminary budget. The termination fee represents about 1.5 percent of the $4.1 billion the Port Authority expects to collect from fees generated by its airports, bridges, tunnels, ports and marine terminals. The agency has $2.4 billion in reserves.

First Albany Capital Inc. advised the Port Authority on the 2006 swap contracts, earning $667,000 in fees.

When the authority entered into the swaps, it agreed to pay fixed rates of about 4 percent, while receiving 70 percent of the 1-month London Interbank Offered Rate (US0001M), or Libor.

The Port Authority amended the swaps in April and May of 2009, agreeing to pay fixed rates of 4.5 percent in exchange for deferring payments into the fourth quarter of 2010, according to the agency’s annual report. One-month Libor is now 0.24 percent.

As part of the 2009 amendments, two of the counterparties were granted the option to terminate the contracts beginning this year. Swap Financial Group LLC advised the Port Authority on the renegotiation, the agency said.

To contact the reporter on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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