Secrets of a successful restructuring

Numerous public-private partnerships (PPPs) have been formed in recent years as a device for funding infrastructure projects such as ports, toll roads and other transportation projects, sewer systems and parking garages. State and local governments, which have been strapped for cash to spend on infrastructure projects, have granted private entities the right to operate various projects in exchange for a significant up-front and/or periodic payment. Investors in these projects viewed these investments as relatively safe because the projects were expected to have a steady stream of revenue.

In actuality, however, several of these infrastructure projects have failed to meet the revenue projections upon which the financing was underwritten. Consequently, some have been unable to satisfy their debt service requirements, necessitating a financial restructuring. Certain toll roads, in particular, suffered from the effects of the economic recession and rising gas prices (which drove down traffic overall) or the availability of alternative free public roads (which dissuaded drivers from using toll roads). In other instances, toll roads have not achieved revenue projections because they were built in anticipation of new housing and commercial developments that never materialised in the wake of the Great Recession.

Traditional restructuring tools

In a financial restructuring of a troubled infrastructure project, parties should look to traditional restructuring tools. At the same time, there are special considerations to be addressed in restructuring infrastructure projects. The traditional tools employed with respect to the restructuring of any project finance deal – such as an amendment to the financing documents and/or a conversion of debt to equity -may also be used for infrastructure projects. In a restructuring of the finance documents, the key constituencies may agree upon extended maturity dates, revised interest rates and amended financial covenants, among other terms.

For example, in the San Joaquin Hills toll road deal, $2.06 billion in toll revenue bonds were restructured by extending maturity dates, revising the debt-service coverage ratio and reducing annual debt service. Debt restructurings were also implemented for the Dulles Greenway (Virginia) and Southern Connector (South Carolina) projects.

As an alternative, lenders may seek to convert their debt, in whole or in part, to new equity in the project. The lenders to the South Bay Expressway in southern California converted part of their debt into equity interests in the toll road following its 2010 Chapter 11 bankruptcy.

A financial restructuring may employ both an amendment to financing documents as well as a debt-to-equity-conversion. The most direct route to implementing a restructuring is a consensual out-of-court amendment of the applicable credit agreement or, in the case of bonds, an exchange offer and consent solicitation. If the parties seeking to restructure do not have the consent of the requisite number of holders under the relevant agreements, they may rely on the additional tools and leverage granted under the United States Bankruptcy Code.

In order to confirm a reorganisation plan under the Bankruptcy Code, the plan must be approved by creditors holding at least two-thirds in amount and one-half in number of voting creditors for each creditor class (subject to certain exceptions for non-consensual classes). If the relevant agreements have more stringent voting requirements, then an in-court restructuring may have greater potential for achieving the necessary voting requirements and, therefore, an increased likelihood of success.

Unique challenges in restructuring infrastructure projects

As parties look to restructure the financing for troubled infrastructure projects, they should be aware of certain challenges common to infrastructure restructurings. For example, bondholders typically have recourse only to the revenues generated by the project, i.e., not the underlying assets, and thus the failure to meet revenue projections is a matter of particular concern to investors. It is important for the parties in a restructuring to reach consensus regarding the amount of stabilised cash flow, which in turn requires an understanding of the challenges inherent in generating additional revenue from an infrastructure project.

For example, toll road operators may attempt to increase toll revenues by raising tolls or experimenting with flexible pricing. The ability to raise tolls, however, may be dictated by the terms of a concession agreement with the local authority that granted the private entity the right to operate the toll road. In addition, operators of toll roads must account for elasticity of demand and recognise that raising tolls may cause drivers to use alternate routes.

The terms of the concession agreement may also affect the ability of the parties to the restructuring to extend the maturity dates on the loans or bonds that financed the project. While an extension of maturity dates may pave the way for a viable restructuring – and afford parties additional time for revenues to improve – private concessionaires may not be able to extend maturity dates without consent from the owner of the project. An extension of maturity dates was a key component of the restructuring of the financing for the Southern Connector toll road near Greenville, South Carolina. The project failed to meet revenue projections from the outset, and the entity managing the toll road filed for Chapter 9 bankruptcy protection in June 2010. The debtor had approximately $320 million in outstanding bond debt at the time of filing. Ultimately, the existing debt was exchanged for $150 million of new bonds, which had staggered maturities extending out to 2051.

Parties should likewise consider the terms of the governing concession agreement before attempting to convert debt to equity. The concession agreement may have change of control provisions that impair the ability of debt holders to control the equity in the public-private partnership.

Finally, bonds issued in connection with infrastructure projects are frequently insured, or “wrapped,” by monoline bond insurers. The wrap is only as good as the financial strength of the wrap provider. The wrap agreement may also exclude individual creditors from participating in the restructuring process or otherwise taking action unless the wrap provider is in default. Thus, it is essential that investors also scrutinise the wrap agreement in order to forge a means for participating in the process.

The challenges and lessons learned from toll road project restructurings are also applicable to other infrastructure project restructurings. For example, the Las Vegas Monorail Co., the operator of a driverless monorail system connecting various casinos in Las Vegas, filed for Chapter 11 relief in January 2010. Financed with $650 million in tax-exempt bonds, the Monorail opened in 2004, and its performance fell below expectations almost immediately. Some $451.2 million in first-tier bonds were wrapped by Ambac Assurance Corp., which itself filed for bankruptcy four months after the Monorail filed for Chapter 11.

Ultimately, Ambac paid the Monorail’s bondholders approximately $111 million in cash, together with the potential to receive further payments from future Ambac surpluses. The bankruptcy court overseeing the Monorail’s Chapter 11 case confirmed a plan of reorganisation that provided for cancellation of the outstanding bonds and the issuance of $13 million of debt to replace the $451.2 million in first-tier bonds.

Revenue shortfalls have also plagued the Bronx Parking Development Co. (BPD), which built or refurbished various parking facilities around the new Yankee Stadium that opened in 2009. BPD, which was funded with $237.6 million of unrated, uninsured tax-exempt debt issued by the New York City Industrial Development Agency and $70 million in state subsidies, operates these parking facilities under a lease with the City of New York. The combined average occupancy for the parking facilities was 43 percent in 2011 during games and other Yankee Stadium events – an amount severely below the initial 88 percent occupancy projections.

Original forecasts did not properly account for mass transit options, including a new spur that was built for a commuter rail service with very close proximity to the stadium. BPD consented to management changes in March 2011 and was subsequently compelled to draw on reserves to make debt payments in 2011 and 2012. More recently, BPD has said that a restructuring of its bond obligations will be necessary with investors taking losses, or it might have to file for Chapter 11 bankruptcy protection.
The recent successful restructurings of several toll roads and other infrastructure projects demonstrate that traditional restructuring tools remain viable options in restructuring infrastructure projects. At the same time, infrastructure projects present some unique hurdles that must be addressed and overcome in order to effect a successful financial restructure.