The Washington Metropolitan Area Transit Authority is set to issue $625.4 million of second lien dedicated revenue bonds through a negotiated sale on July 8. With the interest on the bonds exempt in D.C., Maryland, and Virginia, there is an expectation of strong interest from in-state buyers. Despite the lower priority of these second lien bonds, both S&P Global Ratings and Kroll have issued the issuance a AA rating. This sizable deal carries implications for a market that is favoring higher yields and greater risk.
According to Patrick Luby, head of Municipals, Senior Municipal Strategist at CreditSights, demand for higher yields on low-investment grade rated bonds is strong nationally. However, most of the current supply has been for mid- to upper-grade investment bonds, suggesting that the demand for WMATA bonds may need to attract attention from national buyers due to the deal’s size.
The creditworthiness of the District of Columbia, the commonwealth of Virginia, and the State of Maryland plays a significant role in backing the WMATA bonds. Combined, these entities contribute about $500 million in revenue per year dedicated to capital funding for WMATA. The subsidies are subject to appropriation, with Maryland and Virginia limiting any annual increases to 3%.
The bonds issued are labeled as “Sustainability – Climate Transition,” with an independent review of its sustainability program conducted by the BLX Group. BLX is affiliated with the International Capital Market Association, Green Bond Principals, and Social Bond Principals programs.
Financial Outlook and Debt Service
Debt service for WMATA is projected to cost just over $160 million per year starting in 2025, reducing to about $80 million per year in 2047. In addition to municipal contributions, WMATA’s funding is supported by farebox revenues, which accounted for 20% of the operating budget last year.
WMATA’s roadshow highlighted ridership projections for fiscal year 2025, with Metrorail expecting 113.7 million trips (a 2.4% decrease), Metrobus planning 111.5 million trips (a 5.5% increase), and MetroAccess predicting 1.48 million trips (a 4% decrease). While changes in ridership impact finances and political support, the budget gap led to a 12.54% rate hike to maintain service levels, avoiding service cuts.
Facing a $750 million budget gap and a negative outlook from Fitch Ratings, WMATA implemented rate hikes on all modes of transit in June. As federal stimulus money wanes and ridership remains low due to remote work trends, public transit systems across the country are grappling with financial stability. The negative outlook from Fitch highlights concerns about continued municipal support at required levels.
The issuance of the second lien dedicated revenue bonds by the Washington Metropolitan Area Transit Authority presents an opportunity to attract investors locally and nationally. Despite challenges in ridership and budget gaps, the sustainability and creditworthiness of the agency, paired with strong market demand, position the bonds favorably in the current economic climate. It is essential for WMATA to continue to navigate these challenges and maintain investor confidence to ensure the success of this bond issuance.