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'LEASE BACK BOOMERANG!'

 
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Mr. Linsky
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Joined: 16 Apr 2007
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Location: BRENTWOOD, CA. - WOODMERE, N.Y.

PostPosted: Sat Oct 18, 2008 5:55 pm    Post subject: 'LEASE BACK BOOMERANG!' Reply with quote

MTA MAY HAVE TO CUT COMMUTER SERVICE

It may not be able to keep trains and buses running if it has to quickly pay investors in AIG-related lease-back deals.

By Steve Hymon and Martin Zimmerman, Los Angeles Times Staff Writers
October 18, 2008

The next potential victims of the nation's credit crunch: nearly 1.5 million people who ride buses and trains each weekday in Los Angeles County. Transit officials say riders could soon be facing serious service cuts.

That's because the Los Angeles County Metropolitan Transportation Authority might have to quickly come up with hundreds of millions of dollars to pay investors under terms of deals it made involving American International Group, the troubled financial and insurance giant.

"I've lost a lot of sleep over this," said Terry Matsumoto, the chief financial service officer and treasurer for the MTA. He said it was "absolutely" certain the agency would have to cut service if the deals sour.

The problem, Matsumoto said, could extend beyond the MTA to other large transit agencies that entered into similar deals between the late 1980s and 2003, when tax laws were changed to discourage such transactions. Among those is Metrolink.

The news comes at a tough time for the MTA.

The agency recently lost $133 million in state funds, and declining sales tax revenues mean it will have less money to help keep its buses and trains rolling.

An AIG spokesman declined to comment, citing the confidentiality of deals with its customers.

Between the late 1980s and 2003, the MTA sold its rail equipment, more than 1,000 buses, a parking garage and maintenance facilities to investors that included Wells Fargo, Comerica and Phillip Morris in separate deals.

Lease-back deals are a common way to raise money in the corporate world. A manufacturer, for example, could sell its factory to investors and then lease it back. The manufacturer gets a large chunk of cash and the investors get a steady stream of lease payments as well as a tax break for their depreciating property.

"It's a great way to get a shot in the arm in terms of cash without actually divesting yourself of your property," said Bill Holder, an accounting professor at USC.

Many of the nation's largest transit agencies participated in such deals. Among them are the San Francisco Muni system, the BART rail system in the Bay Area, the Chicago Transit Authority and the Washington, D.C., Metro system.

Metrolink, the Southland's commuter rail agency, also sold most of its train cars and locomotives in four lease-back deals -- three of which involved AIG -- and made a $35.5-million profit as a result, said spokesman Francisco Oaxaca.

Metrolink, like the MTA, must now find another firm to replace AIG.

"The potential is pretty horrendous across the industry," said James LaRusch, the chief counsel for the American Public Transportation Assn., a trade group for transit agencies.

"It's typically going to impact the largest transit agencies," he said, "because they were the ones that had the kind of assets necessary to get into these kind of deals."

LaRusch said about 30 of the largest transit agencies in the nation have some involvement in such deals.

"Any time you take money from the agency, you are going to cause a cutback in service," he said.

In the case of the MTA deals, AIG provided $1 billion in loans to finance the transactions. The company, in return for fees paid by the transit agency, also guaranteed that the lease payments to investors would be made on time.

Things started to go downhill when AIG ran short of cash after running up billions in losses tied to the housing slump. Its credit ratings were slashed and the firm was on the verge of collapse last month when it was bailed out by the federal government.

The lower credit ratings triggered a clause in the lease-back agreements that require the MTA to either find a new firm to guarantee the deals or reimburse investors for their down payments and lost tax benefits, a scenario that could cost the transit agency between $100 million and $300 million.

COMMENT; What else could possibly go wrong!? Embarassed

Mr. Linsky - Green Bus Lines, Inc., Jamaica, NY
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