The first European-style PPP to finance in the US capital markets, the Chicago Skyway refinancing had a lot riding on it – it was, in effect, part two of a predetermined plan that has not only set the template for US infrastructure PPP but, and more importantly to the sponsors Cintra and Macquarie, delivered a respectable internal rate of return (IRR) on a buy that had been criticised as being too expensive.

A consortium comprising Cintra (55%) and Macquarie Infrastructure Group (MIG) (45%) bought the 99-year Skyway concession in 2004 for $1.83 billion – $1.1 billion more than the nearest other bidder, which prompted speculation that the pair would struggle to make a good return.

With the original debt package syndicated by March 2005 the IRR stood at 10%, which although acceptable for a strategic first-time investment, was low compared with the 12%-15% norm in the roads sector.

Within two months of syndication close on the project debt a capital markets refinancing RFP was out. What was expected by the market was a zero coupon issue. What appeared was far more sophisticated – a synthetic zero coupon bond issue featuring accreting fixed interest swaps on floating rate notes covered by a triple-A monoline wrap that is extendible out to 53 years should a Series C refinancing prove necessary in the future.

The financial engineering caused a 150bp-plus jump in IRR to around 12%-13% – good considering Skyway has consistently broken new round in the financial markets and the sponsors' latest US joint acquisition, Indiana Toll Road, is predicted to have a 12.5% IRR. Furthermore, the deal released $373 million of capital back to shareholders less than seven months after the acquisition closed and prefunded an $80 million capital improvement programme.

Mandated to Citigroup and Goldman Sachs as joint managers, with Macquarie Securities as both selling group member and advisor to the sponsors, the refinancing is designed to pay as little interest, at the most stable rate, over the longest period possible. Around 70% of the debt accretes while permitting distributions to shareholders.

The structure features two senior secured 144A bond tranches totalling $1.4 billion and a $150 million subordinated holding company level bank loan. The two senior tranches comprise $439 million of series A floating rate notes priced at 28bp over Libor with a bullet maturity after 12 years (2017); and a $961 million series B of floating rate notes priced at 38bp over Libor and which pay interest only for the first 14 years and then amortize to final maturity in 21 years (2026).

The Series A Bonds were swapped to a vanilla fixed rate. The Series B Bonds had an innovative accreting fixed rate swap under which the project company has only limited net cash payments until 2017, when repayment of the accreted swap interest and bond principal starts. The combination of accreting swap and bond creates a synthetic zero coupon bond. At its simplest the bond is sculpted to prospective cash flows and, in effect, has a loan embedded in the swap. The counterparties on both swaps are Goldman Sachs and Citigroup, with FSA wrapping the project company's obligations.

The deal was structured to achieve the lowest coverage possible, thereby increasing senior indebtedness by $300 million whilst still being consistent with an underlying BBB-/Baa3 (S&P/ Moody's) rating which FSA wrapped to AAA/Aaa. And because the FSA wrap extends to 53 years either tranche can be financed at maturity through a Series C issue and therefore the deal comes with no refinancing risk.

The final element in the financing was a subordinated holding company loan of $150 million. This is lent at a level below the two shareholders and is thus dependent upon distributions from the project company for repayment.

Lenders on the 30-year sub-debt are BBVA, Calyon and Santander, with the debt priced at 250bp over Libor to year six and 300bp thereafter. The loan features a cash sweep of 50% during the first six years and 100% thereafter, although any payment is subject to there being cashflow available, and if not, no penalty interest applies.

With both Cintra and MIG expected to be back in the market in the coming months with an even bigger deal for the $3.8 billion Indiana Toll Road concession – subject to Indiana's legislative assembly approving the acquisition – both the original Skyway debt financing and refinancing templates will likely be repeated.

But more significantly Skyway is the deal that spawned a US PPP market, and although some US bankers are still wary of tying up debt at what they perceive to be low European-flavour margins, US PPP looks set to become a fixture in US infrastructure, since the US government has allocated up to $15 billion to support privately financed toll road construction.

Skyway Concession Company
Status: Bonds closed 16 August 2005. Sub-debt 17 August 2005.
Size: $1.55 billion
Location: Chicago, Illinois
Description: First capital markets refinancing of US PPP concession
Sponsors: Cintra (55%), Macquarie Infrastructure Group (45%)
Senior debt: $439 million series A of current interest senior secured bonds due 2017 and a $961 million series B of capital accretion bonds due 2026.
Joint managers: Citigroup, Goldman Sachs
Selling group member: Macquarie Securities
Swap counterparties: Goldman Sachs, Citigroup
Monoline: FSA
Sub-debt: $150 million
Sub-debt providers: BBVA, Calyon, Santander
Counsel to underwriters: Milbank Tweed Hadley & McCloy
Counsel to sponsors: White & Case
Counsel to subordinated lenders: Orrick
Counsel to monoline: Debevoise & Plimpton
Traffic and toll revenue consultant: Maunsell
Traffic auditor: Halcrow Group
Technical consultant: Consoer Townsend Envirodyne Engineers, Inc.
Technical auditor: Halcrow Group