Indiana Toll Road: Swap shop

The largest PPP financing and one of the largest non-recourse deals in the US to date, the Indiana toll road financing achieved both high leverage (around 81% despite its size) and most significantly an accreting interest rate swap for 100% of that debt – an innovation that first featured on the refinancing of the Chicago Skyway concession.

The Indiana Toll Road is a 156.7-mile four-to-six lane toll road running across the northern part of the state of Indiana. The lease, for which sponsor Statewide Mobility Partners (a 50/50 joint venture between Macquarie and Cintra) paid the state $3.8 billion, has a 75-year term and a provision that the state cannot build a similar competing road within 10 miles of the existing route. It also has a provision within the concession agreement that the concessionaire must build expansion capacity on the road should traffic reach pre-agreed peak traffic levels. The state, however, would be ultimately responsible for the acquisition of land for this purpose.

The concession – the first lease of an inter-state toll road in the US – was put out to tender in October 2005 with final bids submitted on 20 January 2006. The bidding was completed in 117 days and submissons were final and binding with a $50 million bid bond lodged as part of the process.

Although Macquarie and Cintra paid around $1 billion more than the nearest other bidder (Babcock & Brown) for the concession, based on independent traffic forecasting by Maunsell the co-sponsors expect to achieve a 13% internal rate of return and a 15-year equity payback period.

The concession terms – particularly those governing the financing and lender step-in rights – are similar to Skyway. The concession features a large amount of capex – $573 million in maintenance and $525 million in renewal, replacement and expansion over the first 25 years. It also includes some increases in tolls, although fewer than initially envisaged, so that long-term wrapped bank or bond solutions would need to contend with potential revenue volatility.

The $4.063 billion debt financing – lead arranged and underwritten by BBVA, BNP Paribas, Caja Madrid, DEPFA, Dexia Credit Local, Royal Bank of Scotland and Banco Santander – used an innovative structure comprising a liquidity facility, a 20-year stepped interest rate swap and a revenue stabilization reserve that allowed equity yield while the debt was capitalizing. The banks split the debt equally, and funded on 29 July, while the state received the lease payment on 30 July.

The two sponsors contributed $374 million in equity each, while the banks provided an acquisition facility of $3.24 billion, a capex facility of $665 million, and a liquidity facility of $150 million – all three tranches structured as nine-year bullet maturities.

The deal priced notionally at between 95bp and 125bp over Libor, although the swap arrangement allows for prearranged increases in a fixed coupon over time. The initial interest rate is 3.15%.

The step-up swap in the structure – a combination of an asymmetric swap and an interest rate hedge – enabled the project company (ITR Concession Company LLC) to defer some interest payments on the nine-year acquisition debt and the capex tranche until maturity, thus increasing the amount of debt that the project can support. The additional liquidity facility pays any current interest on the other two tranches whilst also providing a buffer against any fluctuations in operating cashflows.

Like the Skyway financing, Indiana is designed for a take-out in the bond markets and features a number of refinancing spurs including cash sweeps later on in the life of the loan.

The deal achieved a strong response in sub-underwriting – lenders were approached in July for $275 million underwriting commitments and sub-underwriting closed in August. General syndication followed in September with over 50 financial institutions featuring in the final line-up.

Although the sale proceeds from Indiana were in excess of what is required to fund the state's transport programme for the next 10 years, the response of the Indiana public and some of its legislators has not all been positive.
State governor Mitch Daniels won approval for the sale in the state legislature on the back of toll freezes. Until the project company installs electronic toll collection, rates for two axle cars will be frozen, with the state government making up the difference to the project company. Thereafter, drivers will apply directly to the state for a refund until 2016.

However, Indiana – notably the cash benefit – also appears to be generating PPP converts. Daniels' latest bill – SB1 – has been passed by the state senate transport committee and will allow a PPP deal on the 75-mile Indiana Commerce Connector that will link Interstate 69 with Interstate 70. The state will get the concession cash upfront and use it to help build the planned extension of I-69 through southern Indiana. Another provision in the bill also authorises the proposed Illiana Expressway to be privately funded. The 63-mile, limited-access route is intended to relieve congestion in north-west Indiana and near Chicago.

ITR Concession Company LLC
Status: Closed 29 June 2006
Debt size: $4.1 billion
Equity: $810 million
Location: Indiana
Description: 75-year lease of a 157-mile toll road
Sponsors: Cintra; Macquarie Infrastructure Group
Debt: $3.285 billion acquisition facility, $665 million capex facility, $150 million liquidity facility
Mandated lead arrangers: BBVA; BNP Paribas; Caja Madrid; DEPFA; Dexia Credit Local; RBS Securities; Banco Santander
Financial adviser: Macquarie Securities
Sponsor legal counsel: White & Case
Lender legal counsel: Orrick
Seller legal counsel: Mayer Brown Rowe & Maw; Ice Miller
Seller financial adviser: Goldman Sachs
Technical auditor: Hatch Mott MacDonald
Financial model auditor: Ernst & Young