Trimess

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Wednesday, February 23, 2011

Some of the trickery going on here at Trimet capital projects

b) 1997 and 1998 Lease transactions
During fiscal years 1997 and 1998, the District entered into sale-leaseback transactions for 31 light rail vehicles with
a foreign investor. Additionally, in fiscal years 1997 and 1998, the District entered into a series of lease-leaseback
transactions with domestic investors for the same 31 light rail vehicles, plus an additional 41 light rail vehicles and
two rail maintenance facilities.
Equipment sales to the foreign investor resulted in original proceeds to the District of $80,600. The investor leased
all assets back to the District for a period of 18 years. The leases qualify for accounting treatment as operating
leases. Using the proceeds of the sales, the District fully funded payment agreements with American International
Group, Inc. (AIG) totaling $65,849. Under the payment agreements, AIG is obligated to make all required lease
payments. The prepayments by the District to AIG are recorded as prepaid lease expense in the accompanying
balance sheets and are expensed over the term of the lease. The payment agreements do not constitute legal
defeasance. Thus, if AIG fails to fulfill its contractual obligation to make future lease payments, the District will be
required to meet all financial obligations required under the lease transaction.
Under the foreign sale-leaseback agreement, the foreign investor has a put option which requires the District to buy
back the leased equipment if exercised. If the investor does not exercise the put option, the District may offer to
buy the equipment pursuant to the terms of the lease agreement and the lessor shall accept such offer. The District
also deposited $11,995 with AIG, which represents the present value of the options at the buy back dates. These
deposits earn interest at rates ranging from 5.3 percent to 5.9 percent and are recorded as long-term restricted
lease deposits on the District’s balance sheets. The interest earned on the restricted deposits is recorded as a
component of net leveraged lease expense on the statements of revenues, expenses and changes in net assets.
The arrangement discussed in this paragraph does not constitute legal defeasance. Thus, if AIG fails to fulfill its
contractual obligation to fund TriMet’s buy back of the vehicles, the District will be required to complete the buy
back with other funds.
In simultaneous transactions, the District leased its leasehold interest (the Head Leases) in the equipment to
domestic third party investors (the Leasehold Investors) under the 1998 and 1997 leasehold agreements for a
period of 36 and 30 years, respectively. The Head Leases qualify for accounting treatment as operating leases.
The Leasehold Investors prepaid all required lease payments totaling $175,849, which have been recorded as
unearned lease revenue on the accompanying balance sheets. The unearned revenue is recognized over the
terms of the leases.
The 1998 and 1997 Leasehold Investors sublet all assets back to the District for a period of 18 and 15 years,
respectively. The subleases also qualify as operating leases. TriMet used the proceeds of the lease transactions
to fully fund payment agreements with AIG totaling $130,562. Under the terms of the payment agreements, AIG is
required to make all sublease payments. The prepayments are recorded as prepaid lease expenses in the
accompanying balance sheets and are expensed over the terms of the leases.
In addition, the District deposited the present value of the Head Lease purchase options with AIG. The deposits
accrete interest at rates ranging from 5.8 percent to 7.1 percent and are recorded as restricted lease deposits on
the District’s balance sheets. The payment agreements and the funding of the purchase option price do not
constitute legal defeasance. Thus, if AIG fails to fulfill its contractual obligation to make future payments, the
District will be required to meet all financial obligations required under the lease transaction.
The operative documents of the 1997 and 1998 transactions were reviewed and approved by the U.S. Department
of Transportation acting through the Federal Transit Administration. In exchange for its participation in the
transactions discussed above, the District received net cash proceeds of $15,953, which were recorded as
unearned revenue and are amortized over the lease terms.
In the event AIG’s ratings are downgraded by Standard & Poors below “AA” or by Moody’s below “Aa3”, AIG is
required to pledge collateral equal to the present value of AIG’s future obligations under those agreements. In
September 2008, AIG was downgraded to A- by Standard & Poors and A2 by Moody’s, thus triggering the collateral
requirement. By November 2008, AIG had met all collateralization requirements. As of June 30, 2010 and 2009, a
third party custodian is holding securities with a market value of $40,278 and $37,411, respectively, in satisfaction
of AIG’s collateralization requirements. In addition, TriMet was required to replace three standby letters of credit
issued by AIG. In lieu of replacing the letters of credit, and with consent of the equity investors, TriMet pledged
supplemental collateral held by a third party totaling $600, which is recorded as a restricted investment on the
Balance Sheet.
As of June 30, 2010, TriMet is not aware of any default, event of default or event of loss under any of the operative
documents.
In February 2009, TriMet negotiated an early termination of four of the United States lease-leaseback transactions.
These early terminations resulted in liquidation of $20,691 in prepaid lease expenses, $32,114 in long term lease
deposits, and $58,732 in unearned lease revenue. Net of transaction expenses, the 2009 early terminations
created $5,374 in gains recorded as special items within the Statement of Revenues, Expenses and Changes in
Net Assets.

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