CalPERS makes first direct investment in US transport

After acquiring the Indiana Toll Road (ITR) in March 2015, Australian fund manager IFM Investors has offloaded stakes in the asset to the California Public Employees' Retirement System and US insurer Allstate.

The deal marks CalPERS' first direct investment in North American transportation. With the purchase of a 10 percent stake, the pension's infrastructure programme now makes up about $3.1 billion of its total portfolio. Investment director Paul Mouchakkaa said in a statement that the deal “aligns well with [CalPERS'] recently adopted strategic plan for real assets“, which was unveiled last month.

Allstate's stake and level of investment were not disclosed. The firm couldn't be reached for comment before publication. 

Prior to publicising plans to sell stakes in ITR, IFM presented the option privately to a small contingent of its investor base qualifying for co-investments. Among that group, Australia's Construction and Building Unions Superannuation Fund purchased a small undisclosed stake in the toll road in December for A$140 million ($104.3 million; €90.7 million), its second-largest investment at the time. 

IFM acquired ITR from a consortium including Macquarie Atlas Roads, Macquarie Infrastructure Partners and Spain's Cintra, who paid $3.8 billion to the state of Indiana for the original 75-year concession in 2006. In the wake of the financial crisis, declining traffic along the 156-mile motorway forced the concession owners to file for bankruptcy in 2014. 

IFM was cleared to buy 100 percent of the concession from the original investors shortly after. Since acquiring the asset, the firm has been focused on “de-risking the asset to make it not only interesting to us, but other investors that we would see as like-minded”, according to its head of North American infrastructure Julio Garcia.

A key plank in IFM's plan was accomplished through refinancing the project via $1.05 billion worth of senior secured notes last July.

“The main issue that pushed the asset into bankruptcy wasn't operational performance, but capital structure coming out of the GFC,” Garcia told Infrastructure Investor. “We saw earnings and revenue increase every year since privatisation before the asset went into bankruptcy, which didn't make any sense to us because it was a very strong-performing asset. We have a capital structure now that is BBB-rated by S&P and Fitch. We've refinanced the acquisition debt, with some tenors as long as 40 years.”

Garcia explained that discussions about stepping down from full ownership began even before the purchase was made, though no set plans were in place at the time. 

“We really like ITR for the US economic exposure that the asset provides, so we always wanted to maintain a very strong interest in it. But our initial investment of $3.3 billion in equity makes it by far the largest investment in our portfolio so we knew we were going to bring in some partners at some stage.” 

Macquarie and Orrick, Herrington & Sutcliffe acted as advisors to IFM in the transaction. 

ITR is currently preparing for its largest capital improvement project since it was first built in the 1950s. The two-year $200 million pavement rehabilitation programme, known as 80/90 PUSH, will involve the provision of new asphalt, work on interchanges, shoulder replacement and work on 53 bridges as well as the installation of fibre optic cables to provide smarter signage. 

Garcia said the project will not only augment safety and user experience but also reduce lifecycle costs associated with maintaining the asset, noting that “with a 65-year concession, these types of long-term investments are really important”.

IFM is also working through a $30 million project to renovate ITR's travel plazas, which is expected to reach completion in 2018.    

Along with ITR, IFM's Global Infrastructure Fund holds 12 assets, including Manchester and Stansted airports in the UK, Freeport LNG in the US and Mexican toll road operator Conmex in Mexico.