Metro, Bank Make A Deal
Saturday, November 15, 2008
Metro and a Belgian bank seeking to collect $43 million from the transit agency reached a settlement yesterday that agency officials hailed as a victory and that might deter other banks from seeking similar payments from transit agencies in the United States and Europe as a result of fallout from the global credit crisis.
U.S. District Judge Rosemary M. Collyer, who played a key role in three days of negotiations between the two sides, barred them from disclosing details. But based on court testimony and comments earlier in the week, it is likely that KBC Group collected less than the full amount.
Metro General Manager John B. Catoe Jr. said the resolution was a victory for Metro and other transit agencies.
Metro had offered to pay the bank more than $17 million, money the agency set aside years ago. KBC had been seeking an additional $25 million, which would have forced cuts in Metro's $613 million capital budget and hurt its credit rating.
Catoe said there is no longer a threat to either. The message to other banks, he said, is clear: "You can't just walk in and bully a public agency.
"This is a win for the riders of our system and the taxpayers of this region," Catoe said. "Taxpayers have been saved tens of millions of dollars."
Catoe said the settlement "sends a strong message to other banks that they cannot make a financial windfall at the expense of transit riders." He was referring to comments Collyer made in court Wednesday that allowing KBC to collect the full payment would be "an absolute windfall" for the bank. A financial adviser testifying for Metro said that the $43 million sought by KBC would amount to an 11 percent annualized return on the bank's initial investment of $23 million six years ago.
Catoe said the settlement will set a precedent to help Metro resolve 14 similar financing deals with other banks over the next two months. "I'm very optimistic," he said.
Should those agreements go into default, Metro could be forced to pay the banks more than $300 million.
Craig Kline, who represented KBC Group, said the bank was pleased with the outcome, but he would not comment further.
The case was being closely followed by financial institutions and other transit agencies that have received similar bank demands. The deals, once common but prohibited by the Internal Revenue Service in 2004, are known as lease-back transactions and were widespread among transit agencies, water and sewer authorities and other public entities. The agencies received much-needed upfront cash for capital improvements; the private investors, often banks, received a tax shelter.
Metro and other transit agencies "sold" their rail cars or other equipment in paper transactions to banks and then leased them back. Many of the deals were approved by the Federal Transit Administration. The deals allowed the banks to receive billions in tax breaks by claiming depreciation on the equipment. Metro made 16 deals involving 600 rail cars and netted $100 million.