A consortium of Abertis (50%), Citi Infrastructure Investors [CII] (41%) and La Caixa's holding company Criteria (9%) has won the bidding for a proposed 75-year lease of the Pennsylvania Turnpike. If the deal reaches close, the $12.8 billion offered will be the largest sum ever paid for a toll-road concession, backed by the largest ever project financing in the sector.

The consortium beat two other prequalified bidders during a best and final offer (BAFO) stage, as the top two bids were within 10% of each other. Goldman Sachs with Transurban made the initial highest offer, at $11.26, which was raised to $12.1 billion during the BAFO stage. A Macquarie/Cintra team also submitted a bid of $8.1 billion, and was not eligible to continue to the BAFO stage.

Despite exciting wide interest from major players in the international infrastructure market, the deal is far from done. The state's legislature must approve any concession on the asset, and this vote is unlikely to happen before 20 June 2008, when the bid expires. Both the sponsor and the state's Governor, Edward Rendell, have stated that they expect this deadline to be extended.

However, though as yet speculative, the sponsor has secured an $8.5 billion debt financing for the concession. The bank debt is in two tranches; an 18-month term loan which will fund upon financial close, if the authorising legislation is passed, and a seven-year term loan. The debt is priced at 200bp over Libor.

Eight banks are underwriting the financing. These are RBS, RBC, Banesto, UBS, Barclays, Dexia, JP Morgan, and Societe Generale. Each is providing approximately $1 billion.

Jordi Gaells, managing director for toll roads in North America at Abertis, believes that the deal will provide a healthy IRR, in low double-figures, but also recognises the necessity of an imminent refinancing upon financial close, "possibly in the capital markets".

The sponsor is providing approximately $6 billion in equity for the deal, but is also said to be providing a corporate guarantee on 50% of the debt, should it not achieve a refinancing within 18 months.

The concession also includes a $5.5 billion capital expenditure plan over the first 10 years, which is not included in the upfront $12.8 billion payment. The project has been allocated between $1 billion and $2 billion in private activity bonds (PABs) by the federal government. Other of the bidders had also looked into using TIFIA funding for the minor parts of new construction, though it is unlikely that Abertis/CII will pursue this option.

The terms of this proposed financing are perceived to be particularly risky by some bankers involved in the deal, those wishing to participate, and those who opted not to be involved, alike.

There has been country-wide opposition to many US transportation PPPs in recent months. Following the moratorium on private roads concessions passed in Texas in 2007, the recent vote in the California state house against Governor Schwarzenegger's private partnerships initiative, and New York City's rejection of $354 million in federal funding to initiate a congestion charging plan, many investors and politicians alike doubt that Rendell's turnpike motion will pass, despite the impressive dollar values attached to the deal.

Though willing to discuss the asset and the benefits to the state of the concession, neither Gaells nor CII's Felicity Gates was prepared to address the finer details of the financing, though a recent report by Fitch confirms the $8.5 billion proposed debt sum, and places Abertis on a negative ratings watch.

Aside from the political uncertainty of the lease, there is widespread speculation over the way the financing will work. The debt markets are still jittery in the aftermath of the credit crunch and, as one banker, put it, "How do you justify to your board a billion dollars reserved on hold on your balance sheet, in the worst credit crisis in recent history, to fund a deal that isn't even legal yet?"

The change in market climate is reflected in the pricing on the debt; at 200bp, more than double that for both comparable US large toll-road deals. The Indiana toll road priced around the 95bp mark, and the Chicago Skyway's original pricing was 28bp and 38bp on the senior bond debt.

The project was incepted by Rendell following a report from the Pennsylvania Transportation Funding and Reform Commission in November 2006, which outlined the state's deficits in funds for roads, bridges and transit, both in terms of maintenance and upgrading, calculating that the state requires an additional $1.7 billion per year for those purposes.

The state then commissioned a report from its financial adviser, Morgan Stanley, which was issued in May 2007. The report suggested three possible solutions to address the state's transportation needs (search "Pennsylvania turnpike" for details), of which the proposed turnpike lease was one.

The concession was, pre-credit crisis, was estimated by Morgan Stanley to be worth between $12 billion and $18 billion in an upfront payment, dependent on its terms and whether its length was 75 years or 99 years. Indeed, even as late as September 2007, Rendell noted at the Project Finance Magazine North America PPP conference that he believed the asset could raise up to $20 billion.

The actual high bid is thus far at the lower end of the projected spectrum, another reason which has been mooted as why the legislature may vote against the bill.

A further complicating factor in the concession is that the future of Interstate-80 is as yet uncertain. Governor Rendell approved an act passed by the legislature in July 2007, which ostensibly would provide $945 million in additional funding for state transportation development. However, the implementation of Act 44 is dependent on federal approval to toll I-80, which may prove difficult as the revenues from tolled interstate roads are federally required to be ploughed back into that interstate's maintenance, and may not be used for other purposes. Rendell opposes the need to toll I-80, and views the lease as a potential solution to both problems.

Despite the numerous kinks in the plan, a far-from-ideal debt market, and a politically uncertain climate, if the deal succeeds, it has the potential to change the whole face of US transportation PPP.

Pennsylvania Turnpike
Description: Record breaking debt facility for a US toll road lease
Status: In finance
Awarding authority: Pennsylvania Department of Transportation
Sponsors/lessees: Abertis (50%), Citi Infrastructure Investors [CII] (41%), Criteria (9%)
Underwriters/lead arrangers: RBS, RBC, Banesto, UBS, Barclays, Dexia, JP Morgan, Societe Generale
Sponsor legal counsel: Debevoise & Plimpton
PDOT counsel: Mayer Brown, Ballard Spahr