If you’ve ever modeled a toll road concession with TIFIA participation, you know the difficulties posed by the infrastructure lending programme’s so-called “springing lien” provision. The provision ensures that, in the event of bankruptcy, the government’s TIFIA loan “springs” up the capital structure to parity status with senior debt.
The spring can introduce uncertainty into the capital structure of a project and make it more difficult to get a consistent credit rating. The senior lenders, in turn, can demand a higher interest rate in exchange for the uncertainty – all reasons why bankers, borrowers and credit analysts have long sought to ban the springing lien from TIFIA loans.
The TIFIA lending office was aware of these concerns. Speaking at an industry forum in March 2009, Mark Sullivan, former head of TIFIA, was almost apologetic for the springing lien, calling it “the original sin of the TIFIA programme”. He said the lien was a “last-minute compromise” and “could be removed – it’s certainly a possibility”.
In retrospect, one can only be thankful the industry didn’t get its way.
To see why, it’s useful to think back to why TIFIA, short for Transportation Infrastructure Finance Innovation Act, was created in the first place. In the conference report accompanying the transportation bill that created it in 1998, Congress wrote that the objective of the programme was to “help the financial markets develop the capability ultimately to supplant the role of the Federal Government in helping finance the costs of large projects of national significance”. But in doing so, Congress did not want to subordinate taxpayer dollars to private profits. Hence the springing lien: a political necessity meant to ensure that, no matter what happens to a project, the taxpayer gets protected.
That’s exactly what happened in the case of the South Bay Expressway, a Southern California toll road that declared bankruptcy in 2010 with a $140 million TIFIA direct loan still on the books. The loan was subordinated to the $340 million in senior loans held by ten banks. But once the bankruptcy happened, the TIFIA loan “sprung” to the top of the capital structure. That allowed TIFIA to ride out the bankruptcy and re-emerge in April as the owner of a restructured South Bay Expressway in which it now owns debt, equity and has a board seat. The original equity holders – two Macquarie-managed funds – have been wiped out.
The bankruptcy did not go unnoticed in Washington, where everyone these days carries a meat cleaver in search of programmes to hack in an effort to save taxpayer dollars. In a January report to Congress on the state of the TIFIA programme, Transportation Secretary Ray LaHood said the bankruptcy was a first for a TIFIA loan and calmly noted that the loan was on par with the senior lenders and would be restructured accordingly.
Imagine what would have happened had LaHood instead been forced to affix his giant signature on a report telling Congress the Department of Transportation lost $140 million – make that $172 million when you include accrued interest – on a loan to a private toll road. The loss would have made it easy for Congressional foes of public-private partnerships (PPPs) – and there are plenty – to restrict the programme or tighten its purse strings at a time when TIFIA is in greater demand than ever before.
Instead, the springing lien chucked egg in the faces of two Congressmen – former Democratic Congressman Jim Oberstar of Minnesota and Democrat Peter DeFazio of Oregon – who have criticised PPPs as arrangements which leave the public sector on the hook for “bad business decisions” made by private investors. With TIFIA still in the deal and the equity investors out, the South Bay Expressway disproves their rhetoric.
“The risk here was clearly transferred to the private sector,” South Bay Expressway chief executive officer Greg Hulsizer told Infrastructure Investor when the company re-emerged from bankruptcy.
If TIFIA is to enable that risk to be transferred in future deals, investors will have to remember that TIFIA, like every other government agency, is a creature of Congress and exists at its beck and whim. The uncertainties of the springing lien can be priced into a model and de-risked accordingly (by, for example, conservatively gearing a project). But there is no easy fix to TIFIA credit disappearing in the face of Congressional rhetoric over bad PPP loans.