Transurban and Fluor Enterprises signed the master debenture for the financing of the $1.93 billion Capital Beltway high occupancy toll (HOT) lanes project on 20 December 2007. The project, located in Washington DC and Virginia, promises to be one of the first uses of the private activity bond (PAB) instrument, and is also set to feature one of the largest TIFIA loans ever to a privately-owned concession. Part of the financing, however, has yet to sell down, and the sponsors have had to plan for contingencies.

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, a loan from the Federal Highway Administration (FHWA) under its TIFIA programme, a state contribution and equity.

The Virginia Department of Transportation (VDOT) has funded the $409 million capital contribution from the Commonwealth of Virginia to the project and Transurban's DRIVe investment fund and Fluor will fund 90% and 10% respectively of a $350 million equity commitment. Of this sum, $88 million has funded, and the remaining $262 million will be disbursed over the construction phase.

The financing also includes a $587 million TIFIA loan, which is already available, and $587 million in senior debt, for which the concessionaire will issue tax-exempt, PABs to be underwritten by Goldman Sachs. The PAB allocation has been approved by the US Department of Transportation. The deal is expected to reach full financial close in June 2008, when the senior debt funds and the TIFIA loan is drawn.

The PABs will have a 40-year maturity, with the provisional rate hedged at 3.6% for a 20-year period and a margin, yet to be determined, locked in for the first seven years. The all-in cost of funds during the first 20 years is expected to be 5.35%. No repayment of principal is required for the first 25 years of the term. The debt service coverage ratio after the ramp-up phase is set at a minimum of 1.2x and a maximum of 1.45x.

The TIFIA loan also has a maturity of 40 years, at a fixed rate of 4.45%, which is 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 on the TIFIA loan to FHWA for ten years, and after that 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 15 years and, thereafter, default can only occur if less than 25% of interest payments are made.

When the PABs and subordinated TIFIA loans reach maturity, the sponsor hopes to replace both tranches with senior debt. The sponsor has had to lock in competitive financing rates for the forthcoming issue at a time of heightened uncertainty in capital markets. It has already lined up a AA-rated bank (the most convenient candidate with this rating would be the sponsors' financial adviser DEPFA) to provide a letter of credit enhancement for the PABs, in recognition of the fact that monoline insurance may not be available in June. The deal, though, does include provisions that would allow for a later use of credit enhancement.

The construction is to be led and guaranteed by Fluor, with Lane Construction as subcontractor, and will involve the 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, to 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 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 in general operation on the East Coast of the US.

Under this system, there will also be the option for drivers of non-high occupancy vehicles (HOV), with fewer than 3 occupants, to use the HOT lanes at a premium toll rate. The transponders will have two settings, allowing the driver to indicate whether or not the vehicle is a HOV. At present, the HOV initiatives are being under-used in the region, with only 1.7% of the traffic volume qualifying.

The internal rate of return (IRR) is projected to be 13% when the road begins operation, and the concession includes a revenue-sharing agreement with VDOT, under which VDOT will receive a portion of the gross revenue once certain levels of return are met on the project. The VDOT entitlement starts at 5% when IRR is over 12.98%, rising to 15% when IRR is over 14.5%, and 40% when the IRR exceeds 16%. Transurban, as manager of DRIVe, will also receive 1% of the net asset value of the concession as a base management fee, and a $14 million one-off payment at financial close from the DRIVe investment vehicle.

The sponsor estimates the daily revenues on the route to be at $335,000 by 2015, and that these revenues will grow at a rate of 1.3% between 2015 and 2020, and increase at 1.5% thereafter. Its targeted Ebitda margin is 73% between 2015 and 2040, and 81% in the long term.

The project is part of a wider initiative in the region to reduce congestion, as the population of the surrounding area is growing at twice the national rate. It could encourage the adoption of the concept of HOT lanes working in tandem with existing HOV programmes to maximize usage and keep traffic flows steady. But the sponsors first need to bring the pre-cooked financing to completion in an uncertain bond market.

Capital Beltway Express LLC
Status: Closed 20 December 2007
Size: $1.933 billion (including administrative costs)
Location: Washington DC and Virginia
Description: 80-year concession of a tolled section of the ring road
Concession awarder: VDOT
Sponsors: Transurban DRIVe and Fluor Enterprises
Equity: $350 million
Debt: $1.175 billion: $587 million senior debt in PABs, and $587 million in TIFIA loans
Maturity: 40 years
Financial adviser to sponsor: Depfa
Underwriter: Goldman Sachs
Financial adviser to state: KPMG
Legal counsel to borrower: Orrick
Legal counsel to state: Troutman Saunders
Technology and traffic consultant: ARUP, Halcrow
Traffic consultants (sponsor): Cambridge Systematics
Traffic consultant (state): Vollmer