BART Could Lose $40 Million In AIG Collapse

BART Could Owe $40 Million to AIG Investors

By BRIAN WESTLEY
|  Friday, Oct 24, 2008  |  Updated 2:55 PM PDT
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BART Could Lose $40 Million In AIG Collapse

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OAKLAND, CA - UNDATED: (FILE PHOTO) A Bay Area Rapid Transit (BART) train is seen in this undated file photo as it pulls into Oakland, California. (Photo by Justin Sullivan/Getty Images)

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Transit agencies around the country, including BART, may have to come up with billions of dollars to repay investors as long-term financing deals disintegrate, a result of the global credit crisis that could eventually affect millions of commuters.

The problems stem from the collapse of insurance giant American International Group, which had guaranteed financing deals between transit agencies and banks. Officials say about 30 transit agencies across the country have entered into these types of deals, including those in Atlanta, Chicago, Los Angeles, San Francisco and Washington. The fallout could mean less money for new trains and buses at a time when ridership in many areas has been steadily climbing because of high fuel prices.

Rob Healy, vice president for government affairs at the American Public Transportation Association, said some agencies could be forced to increase fares, cut bus routes and delay long-term capital improvement projects.

"You've got agencies struggling to meet increased demand, they are hamstrung by the higher cost of fuel ... and this is exposing them to additional costs," Healy said.

In a once-common practice that the IRS has ended, many transit agencies entered into arrangements in which they sold equipment such as rail cars to banks. The banks then turned around and leased the equipment back to the transit agencies.

Both sides benefited. The transit agencies were given a large sum of money up front, which could pay for various infrastructure upgrades. And the banks were able to rely on frequent lease payments while also writing off taxes on the depreciating property.

The deals were approved by the Federal Transit Administration, which promoted the lease agreements, transit agency officials said.

Washington's Metro transit agency made 16 of the deals, selling 600 rail cars worth more than $1.6 billion. In return, the agency made $100 million.

AIG, which collected fees paid by Metro and other transit agencies, guaranteed that lease payments to the banks would be made on time. But AIG's financial problems have triggered a clause that allows the banks to demand their money all at once.

The Internal Revenue Service has offered a settlement to banks if they end these agreements by the end of the year.

Metro's chief financial officer, Carol Kissal, said Friday the agency is being asked to pay $43 million by next week. She said that under a worst-case scenario, Metro could be forced to make $400 million in payments.

She said owing millions of dollars all at once could hurt Metro's ability to borrow money from other banks and eventually could affect service.

Marc Littman, spokesman for the Los Angeles County Metropolitan Transportation Authority, said the agency participated in eight so-called "sale-in, lease-out" financing deals insured by AIG. The total value of the deals was $1 billion.

Under the agreements, the agency sold buses, train cars, five maintenance divisions, a parking garage and bus plaza to private equity investors and then leased the facilities back from them, Littman said.

"Worst-case scenario is we'd have to come up with $100 million to $300 million very quickly. That would be problematic for us," he said, adding that cutting services or raising fares would be a last resort after the agency looks at all its options.

Bay Area Rapid Transit, the Bay Area's commuter rail system, could also feel the impact of AIG's woes. Six years ago, BART struck a "sale-in, lease-out" deal to sell its rail equipment for $230 million. The agency put $23 million into its general fund and gave most of the balance to AIG, which agreed to make lease payments to the investors over the next 30 years, spokesman Jim Allison said.

Under the terms of the financing deal, BART would have to pay a $40 million payment to the investors if AIG's credit rating drops below B-triple plus. AIG's rating recently fell to A-minus, triggering payments from other transit agencies that reached similar equipment-financing deals involving AIG.

BART officials are concerned about the impact on its $670 million annual operating budget if AIG's credit rating slips further.

"Obviously, we're concerned about the potential to have to make that payment, but we are not in that situation yet, and we're closely monitoring what's happening with the other transit agencies that are in a more difficult position than us," Allison said.

The agencies are asking the Treasury Department and congressional staffers for help. They have proposed that the government step in to back the deals instead of AIG. Metro officials say it is unlikely the agency will find a replacement for AIG.

"We haven't received any real positive statement from the Department of Treasury, who in my view has to make this decision," Kissal said.

A Treasury Department spokeswoman did not immediately respond to a message seeking comment.

Kissal said Metro is working with banks to get extensions. She also said the agency could go to court to fight the banks' demands.

One bank demanding money from the "sale-in, lease-out" deals, KBC Group of Belgium, would not comment when reached by The Associated Press.

"There is client confidentiality, and there is a contractual matter involved," said spokesman Stef Leunens in Brussels.

The Federal Reserve came to the rescue of AIG last month with a two-year, $85 billion credit line, after it fell into peril from the huge volume of credit default swaps it had sold and rising levels of defaulted mortgage and other debt. In return for the $85 billion credit, the government received a 79.9 percent stake in AIG.

Associated Press Writers Noaki Schwartz in Los Angeles, Terrence Chea in San Francisco and Paul Ames in Brussels, Belgium, contributed to this story.

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