Exclusive: BlackRock sees bright future in US street lighting

Following its involvement in the country's first-ever street lighting P3, the firm's infrastructure debt team is eyeing further deals in the sector.

Two months after financial close was reached on the Michigan Department of Transportation freeway lighting public-private partnership (PPP; P3) project, BlackRock has confirmed that funds under its management were involved in the transaction.

While BlackRock was not originally involved in the tendering process in the freeway lighting P3, managing director and global head of infrastructure debt Erik Savi said his team at BlackRock was brought into the deal after the shortlisting process through relationships with the investment team at Star America Infrastructure Partners (Star).

“It was funds managed by BlackRock that provided the debt capital, while Star provided the equity and is part of a consortium of partners that will install the lights and provide the ongoing maintenance.”

Among the features that attracted BlackRock to the deal, Savi said, were its investment-grade credit rating, the strength of the contract and support provided by MDOT as well as the quality of the service provider, Cofely Services.

“The credit quality of the Michigan Department of Transportation was a very critical factor.”

From a broader perspective, Savi noted that “the other thing that drew us into this particular deal is that other states and municipalities are looking to replicate this structure”, including the cities of Chicago and Cleveland as well as the state of Arizona. 

In an external press release that was issued following financial close in August, Allianz Life Insurance North America was identified as the source of the debt capital for the MDOT street lighting P3, however BlackRock – which primarily manages funds for insurance and reinsurance firms and pension funds – would not confirm the source of the funds being utilised to provide the debt capital nor the amount of the capital involved in the debt portion of the project. 

Savi said the infrastructure debt package for the street lighting P3 provided an attractive investment for its clients, who seek long-dated assets to match their long-dated liabilities. 

“In terms of tenor, the maturity of the deal was roughly 15 years, and that hits that sweet spot pension funds and insurance companies are interested in,” Savi said. “In a low-yield environment where there is a general scarcity of risk assets available, investors are drawn to infrastructure debt, where you can still generate premiums as compared to public corporate debt.”

The freeway lighting P3 project, which was first fielded by MDOT in 2013, is the first of its kind in the US market. The project calls on the winning consortium Freeway Lighting Partners (FLP) to upgrade and maintain approximately 15,000 freeway lights across the Detroit tri-county area. As part of the arrangement, FLP is required to keep at least 90 percent of lights operational at the end of the first year and 98 percent at the end of the second year. 

According to MDOT, the annual cost of services under the P3 contract is expected to be lower than what the agency would have to pay for upgrades.