The $2 billion Purple Line light rail transit (LRT) PPP project is the second ever transit PPP to reach financial close in the US, following on from the Denver's $1.6 billion Eagle LRT project closed in 2010, and is the first rail PPP for the state of Maryland.

The deal, the second transport PPP closed by European sponsor Meridiam in the US this year, was financed using a combination of debt comprising private activity bonds (PABs), a loan under the Transportation Infrastructure Finance and Innovation Act (TIFIA) and sponsor equity. The private activity bonds are the first 'green bonds' to be used for for a transit PPP in the US.

While there isn't another deal to replicate the size and scope of the Purple Line LRT in the US on the horizon, the City of Miami Beach in Florida has embarked on the procurement for a modestly sized LRT PPP project in South Beach. The city has received three proposals for the project and is in the process of evaluating them. Construction is expected to begin as early as 2017.

Protracted procurement

The project, which was initially viewed as ambitious, was launched to the market in 2013 under the governorship of Martin O'Malley. His successor Larry Hogan, who assumed office in January 2015, put the project under review but finally approved it in June that year - albeit reduced in scale.

Its developers had worried when Hogan was elected that he would cancel the Purple Line altogether and divert funds to highway projects. Instead Hogan cancelled the proposed $2.6 billion Red Line LRT project in the Baltimore area. He also only approved $168 million in state funds to be used to fund the Purple Line LRT - far less than the planned $700 million proposed during the term of his predecessor, O'Malley.

Under the final agreement signed at financial close, the consortium will receive progress payments from Maryland Department of Transportation during construction, two milestone payments of $100 million and $30 million, respectively, at revenue service availability and final completion, as well as eight special life-cycle payments paid semi-annually over the first four years of operations totaling $28 million. Fitch has assigned a PPP grantor counterparty rating of AA- with a stable outlook to the Maryland Department of Transportation.

The project involves the financing, development, design, construction, equipping, supplying of light rail vehicles for, and operations and maintenance of, a 25.7km light rail transit line with 21 stations that extends from Bethesda in Montgomery County to New Carrollton in Prince George’s County, Maryland.

It will provide connections to four branches of the Washington Metropolitan Area Transit Authority, as well as three Maryland Area Regional Commuter (MARC) rail lines, and Amtrak’s Northeast Corridor at New Carrollton.

Oversubscribed PABs

Light rail transit projects are generally thought to have a more complex risk profile, especially during the construction phase, compared to road or highway projects. But institutional investor enthusiasm was still high for the Purple Line LRT bonds. It is understood that the project's $313.04 million of senior PABs were over 10x oversubscribed, with some maturities more than 20x oversubscribed. 

More than 50 investors submitted orders for the PABs. The yield to call on the longest maturity of PABs (due 2051) was 2.97%. Market sources said that the prolific investor demand is a combination of attractive interest rates and the relative rarity of well structured large PPP assets coming to the market in the US.

The bonds priced on 13 June and settled at close on 17 June. The bonds, issued by Maryland Economic Development Corporation on behalf of the consortium, were underwritten by JP Morgan and RBC Capital markets, while US Bank served as trustee. The bonds were designated as 'green bonds' based on the planned use of the proceeds for a modern electric-powered light rail mass transit project anticipated to improve access to sustainable public transportation opportunities and promote transit-oriented development.

The $874.60 million subordinate 35-year TIFIA loan, the first TIFIA loan to be disbursed to a US transit PPP project, closed on 16 June at a rate of 2.41%. The Denver Eagle LRT financing did not feature a TIFIA loan. 

In addition to the debt package, $138.48 million in sponsor equity was committed, split between consortium members Meridiam (70%), Fluor Enterprises (15%) and Star America (15%).  Fluor Construction, Lane and Traylor Brothers are the construction joint venture for the project. Fluor, Alternate Concepts and CAF have formed an operations and maintenance joint venture with CAF providing the light rail vehicles for the LRT. 

The cumulative savings to the Maryland Department of Transportation under the PPP model from bid to financial close were approximately $100 million on a net present value basis and approximately $220 million on a nominal basis, the department said. 

Advisers

BMO advised MDOT on the procurement, while Nossaman was legal adviser. The sponsors were advised by MUFG and THB Advisory (financial), and Orrick, Herrington & Sutcliffe (legal). Agentis Capital was model adviser.

Latham & Watkins was counsel to underwriters, Shearman & Sterling was TIFIA counsel, while Greengate was financial TIFIA adviser. Ballard Spahr was bond counsel, Miles & Stockbridge was issuer's counsel and Dorsey & Whitney was trustee counsel. 

For the lenders, Turner & Townsend was technical adviser and AON was insurance adviser.