WASHINGTON, Nov 5 (Reuters) - Credit rating agency Standard & Poor's is keeping an eye on transit agency bonds, especially as some agencies are at risk of having to pay huge termination agreements in soured leasing deals. "In many instances, these leases face possible technical default and expose transit agencies to potentially large termination payments," said Standard & Poor's credit analyst Kurt Forsgren in a statement on Wednesday.
Under the contracts for the deals, their private guarantors had to maintain high credit ratings.
Insurance company American International Group, which took an $85 billion loan from the U.S. Federal Reserve on Sept. 16 after large losses from mortgage debt, had acted as guarantor to many of the transit agencies' leasing deals. When AIG lost its "AAA" credit rating, the agencies were in technical default of their agreements.
But this new financial earthquake involves more banking institutions and more bond insurers than AIG that have provided credit enhancement, S&P said.

"Dislocation in the credit markets has complicated the transit agencies' efforts to find replacements for downgraded guarantors," the agency said. "In addition, a desire of certain equity investors and banks to exit leverage leases by the end of the year to settle IRS-initiated lawsuits over tax sheltering is apparently compounding the issue."
In a "lease-back" arrangement, a city sells its municipal properties to a bank or insurance company and then leases them back. But the practice raised concerns at the Internal Revenue Service, which believes illegal profits are gained in such deals.
Members of the U.S. Congress are pressuring the Treasury Department to help transit agencies with their technical defaults and avoid having to pay their counterparties billions of dollars in penalties.
Many of the agencies are seeking new guarantors or working with their counterparties to restructure the deals, S&P said.

(Reporting by Lisa Lambert; Editing by Jan Paschal) Keywords: MUNICIPALS/TRANSIT S&P (lisa.lambert@thomsonreuters.com; +1-202-898-8328; Reuters Messaging: lisa.lambert.reuters.com@reuters.net )

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