TIFIA survives South Bay bankruptcy

The US government’s infrastructure lending arm was left with a smaller-size loan, an equity stake and a board seat on a new company that manages the Southern California toll road on behalf of its lenders. The original equity investors have been wiped out and are no longer a party to the deal.

The South Bay Expressway has re-emerged from bankruptcy with the US government’s TIFIA lending programme still an investor in the deal, providing an important test case on what happens to taxpayer-funded loans when a public-private partnership goes sour.

“At this point, the TIFIA participation is still intact – albeit both as debt and equity – but still intact,” said Greg Hulsizer, chief executive of South Bay Expressway, the re-emerged company which manages the toll road on behalf of its new equityholders: TIFIA and a group of 10 private lenders. Instead, it’s the original equity investors who have been wiped out and ejected from the deal.

“The risk here was clearly transferred to the private sector,” Hulsizer added.

The 9-mile Southern California toll road made history in 2003 when it secured a $140 million direct loan from TIFIA, short for Transportation Infrastructure Finance Innovation Act. It was the first such loan granted to a privately backed project, which was also being financed with $130 million of equity from a Macquarie-managed toll road fund and $340 million from 10 banks whose loans were more senior than the TIFIA contribution.

In March 2010, faced with costly litigation that was draining its coffers and a weak economy that was squeezing its traffic figures, the toll road filed for bankruptcy – a solution Hulsizer said was “unfortunate” for the original equity holders but the best way out of a tough situation.

The bankruptcy came on the heels of a growing debate in Congress about the role of private investors in funding the nation’s infrastructure. Skeptical of such arrangements, two high-ranking members of the House Committee on Transportation and Infrastructure – former Democratic Congressman Jim Oberstar of Minnesota and Democrat Peter DeFazio of Oregon – pushed for an “Office of Public Benefit” to oversee highways developed by privately backed ventures like South Bay Expressway.

“The lack of transparency and unacceptable level of risk assumed by these firms underscores the need for strong public interest protections to ensure that the public partner to these deals is not left responsible for bad business decisions,” the duo wrote in a late 2008 letter to former Secretary of Transportation Mary Peters.

When the toll road eventually declared bankruptcy in 2010, a taxpayer protection built into the TIFIA programme kicked in: a so-called “springing lien” which made the government’s $140 million direct loan as senior as the $340 million of senior loans provided by the BBVA-led banking group. The lien made it possible for the taxpayers to stay a party to the deal and re-emerge out of bankruptcy instead of taking a loss and exiting the investment.

At the time of the bankruptcy filing, Macquarie Infrastructure Partners, Macquarie’s North America-focused unlisted infrastructure fund manager, owned 50 percent of the project. The remaining 50 percent was owned by Macquarie Atlas Roads, successor vehicle to the listed toll road fund that originally invested in the toll road in 2003. They will not have any equity once the post-bankruptcy refinancing closes.

Under the terms of the refinancing, approved last week by Judge Louise Adler of the United States Bankruptcy Court for the Southern District of California, South Bay Expressway will issue new equity which will be held by TIFIA and the lenders on a pro-rata basis according to the proportion of debt they held before the petition, according to the agreement. The expressway’s outstanding debt will also be decreased to $288 million, down more than $240 million from its pre-bankruptcy level of $530 million. A new board representing TIFIA and the lenders will oversee the new company.

Hulsizer, whose management team remained intact throughout the bankruptcy, said he’s beginning to see signs of improvement in the weak economic environment that precipitated the bankruptcy filing in the first place: traffic is picking up modestly as more commuters are opting to use the toll road.

“As the rest of the nation and the state pulls out of the recession, we will come along too,” Hulsizer said, adding: “We’re beginning to see some signs of spring time.”

Even if the spring doesn’t come now, he’s got plenty of time: the South Bay Expressway’s concession on the toll road runs until 2042.