The close of the financing for the $2 billion North Tarrant Express was almost lost in the rush of deals closing at the end of 2009. But it illustrates a potentially important development in the US infrastructure market. The $400 million unwrapped bond component suggests that sponsors are no longer reliant on banks or monolines to help complex traffic risk projects access bond debt.

Banks have a different take. Banesto, Calyon and Banco Espirito Santo were once in line to provide that $400 million debt, and spent most of the middle of 2009 working on the deal. After the financing of the I-595 and Port of Miami Tunnel financings, two Floridian availability deals that used bank tranches, and the Cintra-led SH-130 toll road deal in Texas, banks held a lock on PPP business.

Instead, JP Morgan and Bank of America have produced the second private activity bond financing for a toll road, and the banks complain, in a familiar fashion, that the rating agencies have been too generous to the deal. Moody's rated the deal Baa2, one notch above the deal's $650 million subordinated TIFIA loan, at Baa3, while Fitch rated both bank debt and bonds BBB–.

The financing backs the construction of a 21.4km managed lanes project on the I-820 and SH-183 roads in Tarrant county, Texas, to the north-east of Fort Worth. The sponsors of the project are Cintra (56.7%), Meridiam (33.3%) and the Dallas Police and Fire Pension System (10%), which are providing $427 million in equity in proportion to their stakes. The project is Cintra's second in the state, following its March 2008 closing of the $1.36 billion financing for sections five and six of the SH130 road.

On SH130, Cintra and its partner Zachry were able to close financing with a 14% equity contribution. The toll of the credit crisis is evident by comparing this leverage with North Tarrant. Not only did the sponsors put in 21.3% of the project's cost as equity, but the concession awarder, the Texas Department of Transportation, made a contribution of $573 million. The senior debt per km comparisons make the high-cost North Tarrant look a little more aggressive, at $18.7 million to the SH130's $10.7 million.

The sponsors hold a 52-year concession to build new tolled lanes, two in each direction on I-820, and three in each direction on SH183, alongside existing free stretches of highway. The route is not highly urbanised, and the sponsors need to acquire rights of way themselves, though they will have the ability to ask the state to condemn land using eminent domain if they cannot agree terms with the holders of rights of way.

The road is being built by Cintra affiliate Ferrovial Agroman under a fixed-price turnkey contract, backed by a 50% corporate guarantee, $250 million payment bond, and $250 million performance bond. Cintra is also putting in its equity pro rata and agreeing to make contingent equity contributions if the road goes over budget. These obligations are backed by a corporate guarantee, though if Cintra's corporate debt service coverage goes below 2x, and its debt to Ebitda goes above 6x, it would need to post a letter of credit.

The concession differs in one key respect from the last project to close a private activity bond financing, Fluor and Transurban's Capital Beltway. The $1.93 billion Beltway, which used $589 million in PABs, or $22 million per km, allowed high occupancy vehicles to use the lanes for free. On North Tarrant, drivers will make their choices independent of their number of passengers.

The sponsors will operate a dynamic tolling regime, charging higher rates at peak times to exploit the way that drivers, with a relatively constant idea of the value of their time, will react to congestion on the free lanes. The road will likely cost $0.10 per mile off-peak, $0.20 inter-peak, and $0.45 on-peak, though the operator can charge as much as $0.75. The highest toll rate charged by a managed toll project in the US is the $0.95 per mile charged by the SR91 in California, notes Fitch, though that route is much more physically constrained than North Tarrant.

TxDOT issued a request for qualifications in December 2006, received seven submissions (from Acciona/Omega, Balfour Beatty/Brisa, Itinere, Cintra/Meridiam, FCC, OHL, and ACS/Zachry) in March 2007, and shortlisted four bidders. It issued a request for proposals to the four, OHL, Balfour Beatty/Brisa, Itinere, and Cintra/ Meridiam, in March 2008. By that December, after several Lehman-related delays to the September deadline, only two, Cintra/ Meridiam and OHL, bid. TxDOT chose Cintra in January 2009, after deeming OHL's bid non-responsive.

The procurement method assumed a fixed amount of state contribution, set a cap on the sponsors' ability to raise tolls, and asked bidders how much of the road it could build. There are a total of six potential segments to North Tarrant, (1, 2, 3A, 3B, 3C and 4), of which the Cintra-led grouping will build 1 and 2. The process has echoes of the affordability cap method of project procurement, developed in the UK, but most recently visible in British Columbia's social infrastructures. This output-based specification can be used where detailed planning and permitting is already in place for a larger project.

Cintra's proposal provided an indication of what financing options it was considering. It included both PABs and bank debt (about $300 million each) and about $100 million less equity than the final structure. It offered to raise a bridge loan to the state contribution, cap gearing at 78%, and hoped to raise ten-year bank debt at an initial margin of 250bp over Libor.

The banks, whose pricing held stubbornly above 350 bp, could not match the terms in the proposal, and the sponsors increased the PAB issue to $400 million, the maximum level at which a TIFIA-compliant rating was possible. The sponsors also contributed $100 million more in equity, increased the TIFIA loan by $50 to its final level, and were able to realise some cost savings to keep within budget.

TIFIA has a soft rule of not being the majority provider of debt on any particular project, but only where its rating is below investment grade. TIFIA's low-cost 35-year loan is typically subordinate in cashflow (though not in security), comes with long grace periods on interest and principal, and it is prepared to take a back seat to banks when they have to deal with problems with a financing.

For North Tarrant, the structure includes a sort of super-trustee, which takes control of all current and future collateral for both sets of lenders, and acts as an intercreditor agent, collateral agent, and bond trustee, though in this instance the bond trustee acts more as a paying agent. While Deutsche holds all three roles, it does so under a series of defined agreements, and gains sufficient powers to act as something akin to a bank administrative agent.

The TIFIA loan has a 40-year term, a rate of 4.46%, and includes an additional $54 million in capitalised interest. The continued popularity of the product, as well as the TIFIA joint programme office's flexibility, has kept demand for loans high. As a result, the office has begun to restrict when sponsors can apply for loans to prescribed windows.

The sponsors promised in their proposal to close the financing in December, and met this promise, six months after signing the comprehensive development agreement for the road with TxDOT. The department's original plan was for commercial close and financial close to take place at the same time. Given the disturbance in financial markets, however, it allowed the sponsors 18 months to finish up the financing. This flexibility allowed the sponsors to wait for a suitable financing window.

The financing allowed the sponsors to hold firm with the bank market, especially as bond market conditions improved towards the end of 2009. The issue consisted of $340.8 million in 6.875% bonds maturing on 31 December 2039, and $59.8 million in 7.5% bonds maturing on 31 December 2031. The average yield on the bonds is 7%, and according to the sponsors the bonds attracted a 2.4x subscription level.
Another tax-exempt financing for a private project, the $511 million Brooklyn Nets Arena bond issue, priced with a slightly lower yield, despite having an arguably greater degree of revenue risk.

The sponsors have predicted a 1.2x debt service coverage ratio for the financing in the first year, and a 3.5x ratio after year four, and while the agencies have not endorsed these numbers, bank lenders suggest these figures are aggressive. Still, Fitch in its report on the financing, said that the prosperity of the region, as well as observed switch rates (between 3% off-peak and 44% on-peak) from free to managed lanes on freeways, supported an investment grade rating. The route has existing traffic, is congested, and provides the operator with greater control over revenues than a greenfield road with fixed tolls.

Cintra still has to close the financing for its third Texas concession, the $1 billion 22.5km LBJ-635 managed lanes project, for which Meridiam and the Dallas Police and Fire Pension System are again co-sponsors. Cintra has yet to finalise the financing for that section, though it will again have the option of using a combination of PABs and bank debt. Texas once accounted for about $9 billion of the US Department of Transportation's $15 billion PAB allocation. The close of that financing would mark the end of Cintra's slate of projects in the state, which started in late 2004, when it was named a development partner on the ambitious TTC-35 corridor.

Since then, the state's legislature has neutered the private toll road programme in Texas, Cintra has been forced to give up one concession, for the SH121, to the public North Texas Tollway Authority, and the TTC-35 concept has been abandoned. It is unlikely that Texas will find a use for all of its PAB allocation, which was amassed under the state's late transportation commissioner, Ric Williamson, a big supporter of road PPPs. Cintra will not rule out using the bank option on future projects if pricing comes back. But if it succeeds in broadening the investor base for the debt of its road assets, both current and future, in the US, these setbacks may not have been in vain.

NTE Mobility Partners
Status: Closed 11 December 2009
Size: $2.05 billion
Location: Tarrant County, Texas
Description: 21.4km managed lanes project
Awarding authority:
Texas Department of Transportation
Government contribution: $573 million
Sponsors: Cintra (56.7%), Meridiam (33.3%) and Dallas Police and Fire Pension System (10%)
Equity: $427 million
Debt: $650 million TIFIA loan (does not include $54 million in capitalised interest), $400 million private activity bond issue
Maturity: 22 years, 30 years (PABs), 40 years (TIFIA)
Underwriters: JP Morgan, Bank of America
Financial advisers: JP Morgan, Macquarie
Sponsor legal counsel: White & Case (transaction), Bracewell & Giulliani (Texas)
Bond counsel: McCall Parkhurst & Horton
Underwriter counsel: Orrick
Bond trustee, collateral agent and intercreditor agent: Deutsche
TxDOT legal counsel: Nossaman
TxDOT financial adviser: KPMG
TxDOT traffic consultant: AECOM
Lenders' traffic consultant:
Hatch Mott MacDonald
Independent engineer: CH2M Hill
TIFIA legal adviser:
Hawkins Delafield & Wood
TIFIA financial adviser: Montague DeRose
Model auditor: Operis