Transurban has completed the financing for its acquisition of the Pocahontas Parkway toll road concession in Virginia. The deal is the first senior debt financing for a for-profit concession in the state, and the first US deal for Transurban. The deal loosens the Macquarie/Cintra grip on the US infrastructure market, and illustrates, much more clearly than previous deals, the ascendancy of for-profit concessions over the 63-20 non-profit structure.

The Pocahontas Parkway is an 8.8-mile toll road running to the south of Richmond, the capital of the commonwealth of Virginia. The asset includes a bridge over the James River, and has been open since 2002. The project entered construction in 1998, and was the first to go forward under Virginia's 1995 Public-Private Transportation Act.

Its promoters were Fluor Daniel (now Fluor Corporation) and Morrison Knudsen (now part of Washington Group). The project was funded through a $353.9 million in current interest and capital appreciation bond debt and $24.7 million in subordinated state infrastructure bank debt. The underwriter of the senior bonds, which had maturities of between 2005 and 2035, and had maturities of between 5% and 5.5% (for the current interest series), was Bear Stearns. The Virginia Department of Transportation (VDOT) and the Commonwealth Transportation Board were the formal owners of the project, while the Pocahontas Parkway Association operated and built the road as part of a series of subcontracts.

The project came in on time, but the road was an expensive one, incorporating an additional ramp into Richmond, and the James River bridge, which had to be high enough to allow cargo ships underneath.
The $314 million capital cost was not absurdly high, but traffic has not lived up to predictions. By 2004 the road was having trouble meeting the debt service on its bonds.

The new concession has been assembled around the proposition that the project is viable over the long term – that the demographics of the area south of Richmond will ultimately turn in the favour of the operator. As Michael Kulper, the CEO of Transurban North America, puts it, "the existing tax-exempt bond financing, which features a fixed repayment schedule, did not have enough flexibility to accommodate the lower-than-expected traffic levels."

The sponsor approached the Commonwealth in October 2004 to take over the road and defease its debt, and signed a memorandum of understanding in April 2005 to pursue the transfer further. The proposal involved defeasing all of the debt of the Pocahontas Parkway and running it as a for-profit enterprise. The proceeds of the purchase would be placed in escrow and used to repay the outstanding debt at least until the bonds are callable in 2008.

The new concession, however, comes with some significant alterations, chief among them a revenue-sharing arrangement that decreases the amount of potential profit available to the concession-holder but enables Virginia to share in any excess profits.

Tolls on the road are also set until 2016, with $0.25 raises scheduled for 2008, 2011, 2013, 2014, 2015 and 2016. Thereafter the owner can increase them by the greater of 2.8%, the increase in the consumer price index, or the increase in GDP.

The approach limits the amount that a bidder is willing to pay, but the fact that the Transurban approach was unsolicited, and the road has a short and chequered history makes such an approach practicable. But the political benefits are such that Cintra and Zachry have incorporated just such an arrangement into their proposal for SH-130 in Texas, and Transurban is using the concept on its two other prospects in Virginia.

The project also needs to incorporate an extension to Richmond Airport, which would enhance the viability of the concession, but require additional work. This is budgeted at $45.2 million, and is the maximum that the new holder would contribute to the project. Additional costs would be borne by the Commonwealth. A local developer, HH Hunt, would also pay for access to a new residential development – Wilton Farm.

The sponsor is looking to raise a $150 million TIFIA loan for the airport extension project. This loan, as per the provisions of the SAFTEA-LU Act of 2005, can now be used to refinance commercial debt, provided that the refinancing is accompanied by substantial new construction. The loan is still awaiting approval, however, although the financing does anticipate the possibility that the concession will be subject to a TIFIA lien.

The two tranches break down into $308 million in permanent debt and $100 million in debt that would be refinanced with the TIFIA loan. Transurban is contributing $118 million in pure equity, $22 million in subordinated debt, and is guaranteeing a $55 million standby liquidity facility, which would be drawn to assist in debt service during the ramp-up period. The senior debt has a 30-year tenor, and it has cash sweep features that step up after year 10 to encourage a refinancing. Transurban is predicting that the concession will produce an internal rate of return of 12.6%, although the revenue sharing mechanism kicks in after a 6.5% real project internal rate of return has been met.

Depfa, Transurban's financial adviser, brought in HVB and Banco Espirito Santo as mandated lead arrangers. The three are likely to wait until later on in the year to go forward with a syndication, partly to allow the handover to go forward smoothly, and also because the Indiana Toll Road is presently in the market looking for 10 times as much as Pocahontas will.

There are enhancements available that might have enabled the road to weather a slow ramp-up period. But such solutions will only help concessions win a little breathing space – those which do not enjoy an underlying economic rationale, or whose ramp-up period is so long as to be beyond most bidders' economic horizons, will struggle to attract bidders. Nevertheless, the South Connector in Greenville and the Northwest Parkway in Colorado are among the non-profit projects for which states have apparently been looking for bids.

Pocahontas Parkway
Status: Closed 28 June 2006
Size: $611 million
Location: Richmond, Virginia
Description: 14km toll road acqusition
Sponsor: Transurban
Debt: $410 million
Lead arrangers: Depfa, HVB, Banco Espirito Santo
Financial adviser: Depfa
Sponsor legal: Orrick
Lender legal: Milbank Tweed
Virginia legal: Nossaman
Parkway Association legal: Hunton & Williams
Lenders traffic and technical: Halcrow
Sponsor traffic adviser: In-house
Independent insurance adviser: JLT