Quick off the mark - Infrastructure Investor article on the US transport market - April 2013


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Focus on the financing of US transport projects in 2013

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Quick off the mark - Infrastructure Investor article on the US transport market - April 2013

  1. 1. 36 infrastructure investor april 2013u s t r a n s p o r tThese are heady days for US transportfinance.Afteraterrible2011wherejusttwoprivately financed transport deals closed,2012markedareturntosomekindofform,with five deals worth a combined $3.4 bil-lion closing a total of $2.6 billion in bankdebt, bonds and government loans.This year has picked up where2012 left off. After the closing of theUS Route 460 Corridor Improvementspublic-private partnership (PPP) in lateDecember with the issue of $293 mil-lion in Private Activity Bonds (PABs),2013 began with Puerto Rico’s privatisa-tion of Luis Munoz Marin InternationalAirport at the end of February.Sponsor Aerostar Airport Holdingspaid $615 million to secure a 40-year con-cession of the airport and has committedto $1.4 billion of capital improvements tothe airport over the life of the concession.Aerostar secured $410 million in debttofinancetheconcessionandinitialcapitalworks. A $350 million commercial bondwas priced at the end of February with acoupon of 5.75 percent and rated Baa3by Moodys. The amortising bond, witha 22-year tenor, was expected to close asInfrastructure Investor went to press. Theremaining debt came in the form of twocommercialbankdebttranches:a$50mil-lion three-year capital expenditure facilityanda$10millionrevolvingcreditfacility,allprovidedbyUBSandRBCCapitalMarkets(alsojointbookrunnersonthebond)andthe First Bank of Puerto Rico.And next…Hot on the heels of Luis Munoz comesthe East End Crossing P3. The projectrepresents the state of Indiana’s side ofthe $2 billion Ohio River Bridges mega-project (Kentucky is building its $950million bridge in the project with publicfunds), and will connect KY 841/I-265(Gene Snyder Freeway) in north-easternJeffersonCounty,Kentucky,toSR265(LeeHamiltonHighway)insouth-easternClarkCounty, Indiana.The $1.3 billion East End Crossing isbeingfinancedonanavailabilitypaymentbasis,withthebulkofits$860millioncapi-tal cost being funded by a PAB launchedon March 11 that is targeted to haul in$641.5 million before the end of the firstquarter, though it may achieve as much as$677 million. The bonds are being issuedby the Indiana Finance Authority (IFA)in two tranches – a $445.4 million, 30-yearseries A issue and a $196 million short-term, series B offering. The IFA will passthe funds raised to project sponsor WVBEast End Partners, a consortium of WalshInvestors,VinciConcessionsandBilfingerBerger International Holding. WVB andtheIndianaDepartmentofTransportation(InDOT)willcontributeequitytocovertheremainder of the capital costs.Mayer Brown partner George Miller,whose team is representing WVB on thetransaction, says the remaining funds thatwill give the project its anticipated $1.3billion price tag come from additionalpayments made by InDOT during con-struction.“In addition to the PABs there will bemilestonelumpsumpaymentsmadebytheauthorityduringconstruction,”saysMiller.“This is in addition to the availabilitypayments once in operation. A portion ofthese milestone payments will be used forconstruction, and a portion will be usedto pay the PAB.”TheEastEndCrossingandLuisMunozAirporthaveacombineddealvalueof$1.7billion–morethanhalfof2012’stotaldealvalue-andhaveraiseddebtof$1.1billion,With two major transport deals closing in the first quarter, the US markethas started 2013 with a bang. However, a limited project pipeline meansthis year is unlikely to be the one that heralds a long-awaited boom in UStransport deals. John McKenna reportssector focusQuick off the markEast End Crossing
  2. 2. 37april 2013 infrastructure investorSector reportcompared with last year’s $2.5 billion fromfive deals.PAB relianceTwo of the last three deals in the US – EastEnd Crossing and Route 460 CorridorImprovements – have relied entirely onPABs for their funding solutions. Millerdescribes these tax-exempt instruments,available for highway and surface freightprojects,as“thefinancingofchoice”intheUS market at the moment.However,lookingforwarditisunlikelythatmanyprojectswillcontinuetofinanceon a PAB-only basis. It is more likely thatthey will, like Virginia’s I-95 High Occu-pancy Toll (HOT) lanes P3 last year, turnto a mixture of PABs and TransportationInfrastructureFinanceandInnovationAct(TIFIA)loans.Theselong-term,lowinterestgovernmentloanshaveuntilrecentlybeenrestricted by an annual limit of just $122million per year and to cover a maximumof one-third of total project costs.This all changed last summer whenPresident Barack Obama signed into lawthe Moving Ahead for Progress in the 21stCentury Act (MAP 21). MAP 21 includedmeasures to increase both the level ofTIFIA loans available and the proportionof a project that they could fund. For 2013there are $750 million of TIFIA loans avail-able, and next year there will be $1 billionavailable. These loans will now be able tofinance 49 percent of project costs.“There will be projects going forwardthat have most of their financing comingfrom TIFIA,” says Allen & Overy partnerKent Rowey, whose firm advised both theVirginiaDepartmentofTransportationontheRoute460CorridorImprovementsandthe banks on the Luis Munoz deal.His firm is also working on what couldpotentially be another of 2013’s majortransport deals, the $1 billion-plus NewYork Goethals Bridge Replacement. Allen& Overy is representing Port Authority ofNew York and New Jersey on the project,and Rowey says he expects a large amountof financing for the scheme to come viaTIFIA.“Goethalsisanavailabilitypaymentdeal,and will probably be highly leveraged at [adebt:equity ratio of] around 90:10,” saysRowey.“It remains to be seen whether theremainder of the finance will be throughPABs or a bank consortium.”Tough for the banksIfthereisbankdebt,itisunlikelytoplayasig-nificant role. Both Rowey and Miller agreethat with the long-term nature of TIFIAloans–whichcanextendupto40years-andPABs,thebankmarketisunabletocompeteontenor(exceptasbridgefinance),evenifit can occasionally compete on price.“If there’s an allocation for PABs andTIFIA, you’re always going to take it, whichtends to crowd out the bank market,” saysRowey.It is not only the bank market that iscrowded out of investing in US transport,says J.P. Morgan Asset Management infra-structure debt portfolio manager BobDewing.“Ourdebtfunddoesn’thaveasingleUSasset at the moment,” says Dewing.“The risk-return characteristics of Euro-pean assets are far more attractive than theUS.TIFIAisafantasticprogramme,buttheylend at very low rates and commercial lend-ers are never going to compete.”Looking forwards, in addition to Goe-thals there are a number of deals that haveapplied for TIFIA loans that may close in2013. These include:• the$545millionI-77HOTLanesprojectin North Carolina• the $611 million Mid-Currituck Bridgein North Carolina• the$960millionprojecttoconstructtheNorthwest Corridor in GeorgiaMeanwhile, Florida in March issuedRequests for Qualification (RFQs) for itsInterstate-4 “Ultimate Project”, a 40-yeardeal that will be the largest P3 in the state’shistory, topping the $1.5 billion P3 for theI-595corridorimprovementprojectin2008.TheremayalsobemovementonNewYork’s$3.6 billion La Guardia Airport expansionand Alaska’s $1 billion Knik Arm crossing,althoughthesedealsaren’texpectedtoclosethis year.Mixed feelingsWhile2013maywellbeasgood,ifnotbetterintermsofdealsdone,thanlastyear,Rowey,Miller and Dewing all have mixed feelingsabout the state of US transport finance.Miller describes the market as “on theupswing”,whileDewingclaimsheisn’tthatexcited about the coming year, expectingbureaucratic delays to hamper some keyprojects.Rowey says: “Every year we are seeingmore and more transactions coming tomarket. Ohio [East End Crossing], Goe-thals, and Luis Munoz are all big transac-tions for 2013. This creates momentumand shows P3 to be a viable method fortransportation projects and encouragesothers to go the same route.“The market is still nowhere near to itsfull potential. The need for new roads andbridges is in the multi-trillions in the US, sothree deals, while big in relative terms, isonly scratching the surface of what couldbe done.” nMiller: representing WVB