Derivatives Portfolio Report

Metropolitan Transportation Authority

Patrick McCoy, Director of Finance

November 26, 2012

MTA’s Derivatives Program Allows the Use of Interest Rate Swaps and Options and Fuel Hedges

• Synthetic Fixed Rate Debt: To achieve a lower net cost of borrowing. (Floating to Fixed Rate Swaps)

• Interest Rate Hedges: To protect against the potential of rising interest rates by capping exposure.

• Fuel Hedges: To establish more certainty and stability in budgeting the future price of commodities used by MTA.

Speculative Interest Rate and/or Fuel Hedges are not permitted.

2

Interest Rate Swaps

4

Notes:

1 As of September 30, 2012 and excludes State Service Contract Bonds.

Traditional Fixed$26.4 Bn

84.1%

Unhedged Variable$2.3 Bn

7.4%Hedged Variable:Synthetic Fixed Rate

$2.7 Bn8.5%

Synthetic Fixed Rate Debt Exposure is Less than 10% of Overall Debt1

Synthetic Fixed Rate Debt is Cost Effective

• Synthetic fixed rate debt costs less than non-callable traditional fixed rate debt at the time of issuance.

• On an annual basis, MTA swap portfolio savings are estimated at approximately $19.6 million, relative to the cost of fixed rate bonds, at the time of issuance.

• The weighted average cost of the synthetic fixed portfolio is 3.77%. vs. 4.40% for traditional fixed-rate bonds - including recent 2012 refinancings.

• Synthetic fixed rate exposure continues to be manageable at 8.5% of total outstanding debt.

• Mark-to-Market values do not impact capital or operating budgeting.

5

Synthetic Fixed Rate Cost of Capital Compares Favorably to Traditional Fixed Rate Debt

6

Ave

rag

e C

ost

of

Ca

pita

l Average Budgeted Cost of All Debt

4.30%

Synthetic Fixed 3.77%*

Total UnhedgedVariable

4.00%*

*Excludes 58bp of variable rate fees.

In 2012 MTA Reduced Exposure to a Recently Downgraded Counterparty

• Counterparty Risk Mitigation Strategy– Transaction 1 - As a result of a downgrade of the ratings relevant to Citigroup

Financial Products Inc. (CFP) to Baa2 by Moodys, TBTA competitively bid a termination of the two affected TBTA general revenue transactions.

• $88.50 million 5.777% synthetic fixed swap 2 year remaining average life.• $88.60 million 5.777% synthetic fixed swap 2 year remaining average life.• Total termination payment: $19,393,500 plus accrued interest -- 95% of

existing Mark-to-Market.• Total expected PV debt service savings of 8.50%.• Underlying bonds remain in a variable rate mode.

7

In 2012 MTA Reduced Exposure to a Recently Downgraded Counterparty

• Counterparty Risk Mitigation Strategy (cont.)– Transaction 2 - As a result of the favorable economics of transaction 1,

TBTA negotiated the termination of the remaining two TBTA subordinate transactions with CFP.

• $40.40 million 6.07% synthetic fixed swap 3 year remaining average life.• $89.85 million 6.07% synthetic fixed swap 3 year remaining average life.• Total termination payment: $22,318,000 plus accrued interest -- 89% of

existing Mark-to-Market.• Total expected PV debt service savings of 7.75%.• Underlying bonds remain in a variable rate mode.

• Realized Objective• MTA exposure to Citigroup Financial Products has been eliminated.• Increased LOC capacity due to reducing Citigroup exposure to MTA.

8

Outstanding Swaps Aggregated by Counterparty

9

(1) Data as of September 30, 2012. Totals may not add due to rounding.

Swap CounterpartyRatings

Moody's/S&P/FitchNotional Amount

($000)% of Total Notional MTM

  2011 2012(1) 2011 2012(1) 2011 2012(1) 2011 2012(1)

AIG Financial Products Corp. Baa1/A-/BBB Baa1/A-/BBB+

100,000   100,000

2   3

(26,239) (27,948)

Ambac Financial Services, L.P. WR/NR/NR WR/NR/NR 40,700 20,900

1 1

(1,398) (357)

BNP Paribas North America, Inc. Aa2/AA/AA- A2/AA-/A+

196,400 195,600

5 6

(40,571) (44,365)

Citibank, N.A. A1/A+/A+ A3/A/A

196,400 195,600

5 6

(40,571) (44,365)

Citigroup Financial Products Inc. A3/A/A+ Baa2/A-/A

663,750 -0-(2)(3)

16 -0-

(132,215) -0-

JPMorgan Chase Bank Aa1/AA-/AA- Aa3/A+/A+

902,050 885,300

22 29

(251,390) (274,245)

Morgan Stanley Capital Services Inc. A2/A/A Baa1/A-/A

440,000 440,000

11 15

(31,800) (16,677)

The Bank of New York Mellon Aaa/AA-/AA- Aa1/AA-/AA- -0-

338,530(2) -0- 11 -0- (79,596)

UBS AG Aa3/A+/A+ A2/A/A

1,629,800

840,625(4)

39 28

(190,084) (201,923)

Total    

4,169,100   3,016,555    

(714,267)   (689,476)

(3) Terminated $177,100 on September13,2012 and $130,250 on September 26, 2012.

(2) Novated $338,530 in October 27, 2011 to Bank of New York Mellon.

(4) $785,600 Basis swap matured on January 1,2012.

Fuel Hedging Program

MTA Hedges a Portion of its Fuel Costs to Provide Budgetary Certainty in its Fuel Expense Category

• MTA is currently hedging approximately 50% of its annual ultra-low sulfur diesel (“ULSD”) expenditures pursuant to Prior Board Authorization.

• Current transactions are structured as laddered 18-month strips that are cash settled monthly to provide current and near term budget certainty.

• Freed up capacity is recycled on a monthly basis.• Hedges are procured through a competitive bidding process. • In July 2012 MTA removed Bank of America/Merrill Lynch (“BAML”) from its

approved list of counterparties and is actively working to approve replacements. Staff is not seeking to terminate any existing hedges with BAML as counterparty exposure is manageable.

• Deutsche Bank, and Goldman Sachs & Co. (via J. Aron & Company) remain as approved Counterparties.

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MTA will Expand its Fuel Hedging Program to Increase 2 Year Budgetary Certainty

• On September 27 2012, MTA Board approved an increase of $100 million in the fuel hedge program bringing the total size to $200 million.

• MTA will begin to extend the duration of hedging fuel expenses expected to occur over the next 24 months.

• Targeted hedge amounts will equal 50% of gallons projected to be purchased over the next 12 months with declining hedge amounts over the remaining period.

• Target modifications may occur based on market conditions.

• On a monthly rolling basis freed up capacity will be allocated over the next 24 months and will provide for a 50% hedge of the next 12 months on an ongoing basis.

• The increased capacity will be layered in over the next few quarters.

12

MTA Hedges 50% of Fuel Purchases to Reduce Budgetary Volatility As The Program Has Minimal Impact on Fuel Costs

13

MTA’s Fuel Hedge Program is Successful in Reducing Price Uncertainty

14

Notes:Data as of September 30, 2012. Totals may not add due to rounding.

Fuel Hedges Outstanding By CounterParty

15

Ultra-Low Sulfur Diesel

Notes:Data as of September 30, 2012. Totals may not add due to rounding.

RatingGallons Hedged

Dollars Hedged MTM

Deutsche Bank A2/A+/A+

$2,490,276 $8,000,012 ($409,960)

Bank of America Baa2/A-/A 17,829,319 52,111,091 2,864,778

Goldman Sachs (JAron) A3/A-/A 10,882,223 32,316,659 792,991

Total $ 31,201,819 $ 92,427,762 $ 3,247,809

Appendix

Interest Rate Derivative Contracts Specifics

17

Transportation Revenue

2002D-2 $200.00 4.450% 69% 1-Month LIBOR November 1, 2032 $(91.782)

2002G-1 200.00 3.092 Lesser of Actual Bond Rate or January 1, 2030 $(48.951)

67% 1-Month LIBOR-45 bp

2005D & 2005E 400.00 3.561 67% 1-Month LIBOR November 1, 2035 (111.791)

2011B 6.92 3.092 Lesser of Actual Bond Rate or January 1, 2030 (1.692)

67% 1-Month LIBOR-45 bp

2012B 359.45 3.563 67% 1-Month LIBOR November 1, 2032 (113.175)

Total $1,166.37 $(367.391)

Dedicated Tax Fund

2002B $311.80 4.060% SIFMA September 1, 2013 $(11.818)

2008A 338.53 3.316 67% 1-Month LIBOR November 1, 2031 (79.596)

2008B 128.20 4.060 SIFMA September 1, 2031 (4.859)

Total $778.53 $ (96.503)

Bridges and Tunnels – General Revenue

2002F 20.90 5.404 SIFMA January 1, 2013 (0.357)

2002F 195.50 3.076 67% 1-Month LIBOR January 1, 2032 (44.342)

2003B 0.10 3.076 67% 1-Month LIBOR January 1, 2032 (0.023)

2005A 23.76 3.092 Lesser of Actual Bond Rate or January 1, 2019 (7.595)

67% 1-Month LIBOR-45 bp

2005B 586.80 3.076 67% 1M LBR January 2, 2032 (133.094)

Total $827.06 $(185.411)

Bridges and Tunnels – Subordinate

2000AB(a) $130.25 6.080% SIFMA – 15 bp January 1, 2019 $(24.923)

Total $130.25 $(24.916)

2 Broadway

2004A $114.350 3.092% Lesser of Actual Bond Rate January 1, 2030 $(15.477) Total $114.350 or 67% 1-Month LIBOR - 45 bp $(15.477)

Issue Bond SeriesPar Amount

($Mn)Fixed Rate Paid

(%)

Variable Rate IndexReceived

MTM Values($Mn)

Notes:Data as of September 30, 2012. Totals may not add due to rounding. (a) MTA’s only “off-market” swaps were competitively bid in 1999 and generated over $27 million in proceeds for the capital program.

Maturity Date