Transurban closed the $150 million refinancing for the Pocahontas Parkway and construction of the Richmond Airport Connector (RAC) on 19 June 2007. The deal represents the first instance of Federal debt funding for the refinancing and expansion of an existing, privately-operated road under the Transportation Infrastructure Finance and Innovation Act (TIFIA).

The 1.6-mile, two-lane new roadway will connect the Parkway to Richmond's airport, but only accounts for $45.2 million of the loan. A further $7 million will be used to upgrade the entire road's tolling with an electronic system.

With the exception of $2.6 million in transaction fees, the remainder of the loan, $95.2 million, will be used to repay part of the $410 million senior facility that Transurban closed in 2006 when it bought the Parkway. The arrangers of this facility were DEPFA, which advised on the refinancing, HVB and Banco Espirito Santo. The repayment part of the TIFIA loan, which will be drawn down within two weeks of the close date, brings the commercial loan's balance down to $305.7 million, with a maturity of 2036. The TIFIA loan is subordinate to the 2006 debt, and was always envisaged in the 2006 financing, which was tranched as a $308 million permanent loan, and $100 million bridge to the TIFIA financing.

The loan has a 40-year tenor, with a five-year grace period where interest is capitalised, followed by 15 years of interest-only payments, and fifteen years of amortisation. The pricing is 5.17%; as determined by the standard TIFIA model of 1bp above state and local government series securities (5.16% at closing). The Federal Highways Administration (FHWA), which administers the TIFIA programme, says that project life cover ratio is 1.35x.

Fluor Daniel (now simply Fluor) financed the not-for-profit in 1998 with tax-exempt debt, but revenues did not meet expectations. Transurban approached the Virginia Department of Transportation (VDOT) in 2005, offering to operate and maintain the struggling road under a $611 million concession (for more on this process search "Pocahontas" at www.projectfinancemagazine.com).

Michal Kulper, head of Transurban's operations in the United States, explained that the RAC construction had been envisaged since the 1998 deal, as a project enhancement, and also featured in the concession agreement of 2006. However, despite increased cash-flows since Transurban took control of the road, the revenue improvements were not enough to fund the RAC on a stand-alone basis.

The 2005 legislation, "Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users" (SAFTEA-LU) introduced a provision for the FHWA to refinance private projects with TIFIA money. Kulper suggests that the shape of the legislation was in part influenced by the Pocahontas and RAC projects, and the benefit of the connector both to the Henrico County community and to the airport users, since the airport has seen a 32% increase in passenger numbers in the last two years.

Indeed, from a private-sector perspective, Transurban would not have been able to finance the connector without the federal debt injection, and does not benefit from the refinancing in terms of withdrawing its equity. The planning for both the connector part of the project and the SAFTEA-LU legislation happened simultaneously, and the sponsor assisted in the creation of the relevant part of the law.

Nevertheless, Mark Sullivan, head of the TIFIA programme at FHWA, explained that the adminstration's experimental authorization clause, SEP-15, was employed in this case, as no regulatory and statutory provisions were in place for the deal. The timeframe of the deal also required some interpretation under the TIFIA regulations. There is a limitation of 33% of the total project cost for TIFIA input, but as the original $611 million acquisition closed in 2006, the FHWA had to make sure that 2007 federal funding could be considered as part of the same deal.

The TIFIA debt repayment is on a 25%/75%, mandatory/scheduled ratio during the 15-year interest-only payment period, meaning that of the interest due, only the mandatory portion is needed to avoid default. The scheduled portion is paid only if the cash-flow allows it. In the event that the sponsor should default on a mandatory payment, whether through bankruptcy, insolvency or liquidation, the TIFIA debt becomes pari passu with the senior lien. According to one source close to the deal, the strength of the cashflows, and lock-ups on sponsor distributions make the lenders comfortable that this springing lien will not inconvenience them.

Mike Uhouse, managing director at Depfa's infrastructure finance unit, views the deal as a public-private partnership in the most literal of senses: "In order to make a project that was previously unable to be completed work, the federal government, commonwealth of Virginia and private sector were able to reach an agreement of financing under SAFTEA-LU to assist in the completion of the long-planned Richmond Airport Connector."

Transurban is to offer the construction contract through a request for qualifications, which will be issued imminently. Under the terms of the concession, Transurban will be responsible for the first $45.2 million in capital expenditure, and VDOT will fund any sum above that amount. Construction is scheduled to begin in early 2008, and complete in the second quarter of 2010, while tolls for the connector will be set at $1. Following this deal, Transurban, in partnership with Fluor, is working with TIFIA and VDOT for the state's Capital Beltway HOT lanes project.

Richmond Airport Connector and Pocahontas Parkway
Status: Closed 19 July 2007
Size: $150 million TIFIA loan
Location: Richmond, Virginia
Description: Refinancing of 2006 debt, and construction of 1.6 mile roadway
Sponsor: Transurban
Lender: TIFIA
Financial adviser to sponsor: DEPFA
Legal counsel to sponsor: Orrick
Financial adviser to lender: Taylor DeJongh
Legal counsel to lender: Nixon Peabody
Financial adviser to VDOT: Mercator
Legal counsel to VDOT: In-house (Attorney General's office)
Traffic adviser to sponsor: In-house