Quick off the mark
With two major transport deals closing in the first quarter, the US market has started 2013 with a bang. However, a limited project pipeline means this year is unlikely to be the one that heralds a long-awaited boom in US transport deals. John McKenna reports
These are heady days for US transport finance. After a terrible 2011 where just two privately financed transport deals closed, 2012 marked a return to some kind of form, with five deals worth a combined $3.4 billion closing a total of $2.6 billion in bank debt, bonds and government loans.
This year has picked up where 2012 left off. After the closing of the US Route 460 Corridor Improvements public-private partnership (PPP) in late December with the issue of $293 million in Private Activity Bonds (PABs), 2013 began with Puerto Rico’s privatisation of Luis Munoz Marin International Airport at the end of February.
Sponsor Aerostar Airport Holdings paid $615 million to secure a 40-year concession of the airport and has committed to $1.4 billion of capital improvements to the airport over the life of the concession.
Aerostar secured $410 million in debt to finance the concession and initial capital works. A $350 million commercial bond was priced at the end of February with a coupon of 5.75 percent and rated Baa3 by Moodys. The amortising bond, with a 22-year tenor, was expected to close as Infrastructure Investor went to press. The remaining debt came in the form of two commercial bank debt tranches: a $50 million three-year capital expenditure facility and a $10 million revolving credit facility, all provided by UBS and RBC Capital Markets (also joint bookrunners on the bond) and the First Bank of Puerto Rico.
Hot on the heels of Luis Munoz comes the East End Crossing P3. The project represents the state of Indiana’s side of the $2 billion Ohio River Bridges mega-project (Kentucky is building its $950 million bridge in the project with public funds), and will connect KY 841/I-265 (Gene Snyder Freeway) in north-eastern Jefferson County, Kentucky, to SR 265 (Lee Hamilton Highway) in south-eastern Clark County, Indiana.
The $1.3 billion East End Crossing is being financed on an availability payment basis, with the bulk of its $860 million capital cost being funded by a PAB launched on March 11 that is targeted to haul in $641.5 million before the end of the first quarter, though it may achieve as much as $677 million. The bonds are being issued by the Indiana Finance Authority (IFA) in two tranches – a $445.4 million, 30-year series A issue and a $196 million short-term, series B offering. The IFA will pass the funds raised to project sponsor WVB East End Partners, a consortium of Walsh Investors, Vinci Concessions and Bilfinger Berger International Holding. WVB and the Indiana Department of Transportation (InDOT) will contribute equity to cover the remainder of the capital costs.
Mayer Brown partner George Miller, whose team is representing WVB on the transaction, says the remaining funds that will give the project its anticipated $1.3 billion price tag come from additional payments made by InDOT during construction.
“In addition to the PABs there will be milestone lump sum payments made by the authority during construction,” says Miller.
“This is in addition to the availability payments once in operation. A portion of these milestone payments will be used for construction, and a portion will be used to pay the PAB.”
The East End Crossing and Luis Munoz Airport have a combined deal value of $1.7 billion – more than half of 2012’s total deal value – and have raised debt of $1.1 billion, compared with last year’s $2.5 billion from five deals.
Two of the last three deals in the US – East End Crossing and Route 460 Corridor Improvements – have relied entirely on PABs for their funding solutions. Miller describes these tax-exempt instruments, available for highway and surface freight projects, as “the financing of choice” in the US market at the moment.
However, looking forward it is unlikely that many projects will continue to finance on a PAB-only basis. It is more likely that they will, like Virginia’s I-95 High Occupancy Toll (HOT) lanes P3 last year, turn to a mixture of PABs and Transportation Infrastructure Finance and Innovation Act (TIFIA) loans. These long-term, low interest government loans have until recently been restricted by an annual limit of just $122 million per year and to cover a maximum of one-third of total project costs.
This all changed last summer when President Barack Obama signed into law the Moving Ahead for Progress in the 21st Century Act (MAP 21). MAP 21 included measures to increase both the level of TIFIA loans available and the proportion of a project that they could fund. For 2013 there are $750 million of TIFIA loans available, and next year there will be $1 billion available. These loans will now be able to finance 49 percent of project costs.
“There will be projects going forward that have most of their financing coming from TIFIA,” says Allen & Overy partner Kent Rowey, whose firm advised both the Virginia Department of Transportation on the Route 460 Corridor Improvements and the banks on the Luis Munoz deal.
His firm is also working on what could potentially be another of 2013’s major transport deals, the $1 billion-plus New York Goethals Bridge Replacement. Allen & Overy is representing Port Authority of New York and New Jersey on the project, and Rowey says he expects a large amount of financing for the scheme to come via TIFIA.
“Goethals is an availability payment deal, and will probably be highly leveraged at [a debt:equity ratio of] around 90:10,” says Rowey.
“It remains to be seen whether the remainder of the finance will be through PABs or a bank consortium.”
Tough for the banks
If there is bank debt, it is unlikely to play a significant role. Both Rowey and Miller agree that with the long-term nature of TIFIA loans – which can extend up to 40 years – and PABs, the bank market is unable to compete on tenor (except as bridge finance), even if it can occasionally compete on price.
“If there’s an allocation for PABs and TIFIA, you’re always going to take it, which tends to crowd out the bank market,” says Rowey.
It is not only the bank market that is crowded out of investing in US transport, says J.P. Morgan Asset Management infrastructure debt portfolio manager Bob Dewing.
“Our debt fund doesn’t have a single US asset at the moment,” says Dewing.
“The risk-return characteristics of European assets are far more attractive than the US. TIFIA is a fantastic programme, but they lend at very low rates and commercial lenders are never going to compete.”
Looking forwards, in addition to Goethals there are a number of deals that have applied for TIFIA loans that may close in 2013. These include:
- the $545 million I-77 HOT Lanes project in North Carolina
- the $611 million Mid-Currituck Bridge in North Carolina
- the $960 million project to construct the Northwest Corridor in Georgia
Meanwhile, Florida in March issued Requests for Qualification (RFQs) for its Interstate-4 “Ultimate Project”, a 40-year deal that will be the largest P3 in the state’s history, topping the $1.5 billion P3 for the I-595 corridor improvement project in 2008. There may also be movement on New York’s $3.6 billion La Guardia Airport expansion and Alaska’s $1 billion Knik Arm crossing, although these deals aren’t expected to close this year.
While 2013 may well be as good, if not better in terms of deals done, than last year, Rowey, Miller and Dewing all have mixed feelings about the state of US transport finance.
Miller describes the market as “on the upswing”, while Dewing claims he isn’t that excited about the coming year, expecting bureaucratic delays to hamper some key projects.
Rowey says: “Every year we are seeing more and more transactions coming to market. Ohio [East End Crossing], Goethals, and Luis Munoz are all big transactions for 2013. This creates momentum and shows P3 to be a viable method for transportation projects and encourages others to go the same route.
“The market is still nowhere near to its full potential. The need for new roads and bridges is in the multi-trillions in the US, so three deals, while big in relative terms, is only scratching the surface of what could be done.”
“If there’s an allocation for PABs and TIFIA, you’re always going to take it, which tends to crowd out the bank market”