Capital Beltway: HOT ticket

The model for the financing of Transurban and Fluor's Capital Beltway project in Virginia, and its combination of debt sources, showed innovation in the North American transportation PPP market. The deal was the first to use private activity bonds (PABs), and also featured one of the largest loans from the Federal Highway Administration (FHWA) under its TIFIA programme to a privately-owned concession.

It has been hailed by private sector and government as a model for future congestion relief, as it employs a variable pricing structure, and gives drivers the option of paying to drive in faster lanes. The private activity bonds ran into turbulence in the US municipal bond market after they were issued, but should persuade hesitant sponsors that using a capital markets element in greenfield project financings is worthwhile.

The design, build, finance and operate concession will run for 80 years, including a five-year construction phase, scheduled for completion in the first quarter of 2013. The financing for the project includes tax-exempt PAB debt, TIFIA debt, a state contribution and equity.

The Virginia Department of Transportation (VDOT) is providing the $409 million capital contribution from the Commonwealth of Virginia to the project and Transurban's DRIVe investment fund and Fluor Enterprises committed to a $350 million equity commitment, in 90% and 10% proportions, respectively.

The financing also includes a $589 million TIFIA loan, and $589 million in PABs, whose allocation was approved by the US Department of Transportation. The deal reached commercial close in December 2007, but did not reach financial close until June 2008, when the senior debt funded and the TIFIA loan was drawn.

Goldman Sachs underwrote the 40-year PABs, which were placed in the tax-exempt short-term bond market in June 2008. The bonds carry an 8-year letter of credit arranged by DEPFA Bank (which also acted as financial adviser to the consortium), National Australia Bank, Banco Espirito Santo, and Bank of Nova Scotia.

Over its term, the LC provides credit enhancement to the bonds by guaranteeing payments of interest to the bondholders and promising to buy back the rate-resetting bonds in the event that they cannot be remarketed. Debt service on the PABs, which begins at the end of construction, involves only interest payments for the first 25 years, after which the bonds fully amortize to maturity.

Transurban swapped 100% of the debt to an index of 70% of Libor, at which level the tax-exempt SIFMA index tended to track Libor before financial close, in addition to the fixed-rate payments it makes at 3.6% (the swap rate, plus the margin on the swap). In their first week of trading, the PABs paid a nominal coupon of 1.9%. However, during the worst of the credit crisis in late 2008, the SIFMA and Libor indices diverged by an unprecedented margin, and the SIFMA seven-day index rose from hovering around 2%, to nearer 8% in the aftermath of the market mayhem, though it has now more or less restabilised.

The TIFIA loan also has a maturity of 35 years, at a fixed rate of 4.45%, which was 1bp over the State and Local Government Securities benchmark at the time of close. The terms of the loan include no principal or interest payments to FHWA for ten years, and thereafter interest payments to be funded with excess cash from an account that is maintained to fund equity distributions to the sponsor. Repayments of principal then begin after 25 years. The sponsor cannot default on the TIFIA repayments for the first 6 years after substantial completion of construction and, thereafter, default can only occur if less than 25% of interest payments are made.

The construction, including installation of tolling technology, is to be led and guaranteed by Fluor, with Lane Construction as subcontractor, and will involve a section of the Beltway between the Springfield Interchange and the Dulles toll road, a 22.5km section of the 103km Beltway. It will include construction of four more lanes, two in each direction, on the 8-lane Beltway, and the upgrade of 11 interchanges, and 58 bridges. The construction is at a fixed cost of $1.347 billion, with an additional reserve of $65 million as construction contingency, and a further $40 million in possible capital expenditure. The project is in the first year of a five-year construction period, and works at the site are on schedule.

The project also involves the implementation of variable toll rates dependent on traffic flow and congestion, through a comprehensive electronic tolling system, entirely transponder-based, and compatible with the EZ-Pass tolling system that prevails on the East Coast of the US.

Michael Kulper, Transurban's president for North America, believes that the financing has the potential to serve as a model for projects in the US infrastructure market, as it was the first deal to combine TIFIA and PAB funding on a single deal. Indeed, the combination has been mooted for a number of deals since Capital Beltway reached financial close.

Capital Beltway Express LLC
Status: Closed June 2008
Size: $1.933 billion
Location: Northern Virginia
Description: 80-year concession of a tolled section of the ring road
Concession awarder: VDOT
Sponsors: Transurban DRIVe (90%) and Fluor Enterprises (10%)
Equity: $350 million
Debt: $1.178 billion: $589 million senior debt in PABs, and $587 million in TIFIA loans
Letter of credit providers: DEPFA Bank (lead), National Australia Bank, Banco Espirito Santo, Bank of Nova Scotia
Maturity: 40 years
Financial adviser to sponsor: DEPFA Bank
PAB underwriter: Goldman Sachs
Financial adviser to state: KPMG
Legal counsel to borrower: Orrick
Legal counsel to lenders: Allen & Overy
Legal counsel to state: Troutman Saunders
Bond counsel: Hunton & Williams
Lender technology and traffic consultants: ARUP, Halcrow
Traffic consultant (sponsor): Cambridge Systematics
Traffic consultant (state): Stantec (formerly Vollmer)