The I-635 managed lanes bond issue is the third PPP to close in Texas, and the third private activity bond to close for a US toll road. The $2.7 billion project surpassed the recently-closed North Tarrant Express managed lanes in both cost and size, setting a new benchmark for private infrastructure investment in the state. It may be the state’s last PPP deal, because privately-run toll roads are now subject to a legislatively-imposed moratorium.

Concessionaire LBJ Infrastructure Group, made up of sponsors Cintra (51%), Meridiam Infrastructure Finance (42.4%) and Dallas Police and Fire Pension System (6.6%), used a financing structure almost identical to North Tarrant. The Texas Private Activity Bond Surface Transportation Corporation, a conduit for Texas PPP projects, issued $615 million in public activity bonds, while the project company borrowed an $850 million subordinated and backended TIFIA loan.

The PABs, which have a final maturity of 2040, are secured by the project’s toll revenues and the concessionaire’s rights under the project documents. The bonds have a 7% coupon, equivalent to 290bp over the 30-year US treasury bond yield on 22 June, and were priced to yield 7.23%. Underwriters on the deal were Bank of America Merrill Lynch, JP Morgan, Natixis and Estrada Hinojosa & Company. The bonds were not subject to rule 144A, allowing them to be sold to both institutional and retail investors in the municipal bond market. The TIFIA loan has a 40-year term and an interest rate of 4.22%.

The sponsors are contributing $665 million in equity, or 25% of the overall cost, to be paid over time on a pro rata basis; this does not include roughly $34 million in existing toll revenues that will be used to pay for the lanes. The Texas Department of Transportation (TxDOT), the grantor, provided $496 million, or 18.6% of the total cost. The debt service coverage ratio under the sponsors’ base case scenario is 2.2x in 2016 before rising to 3x by 2019.

By comparison, the $2.05 billion North Tarrant Express was financed with $400 million in PABs, a $650 million TIFIA loan not including $54 million in capitalised interest, $573 million from the state and $427 million in sponsors’ equity. Financing for the earlier project closed in December 2009 and gave sponsors more bang for their buck, with senior debt per km of $18.7 million against LBJ’s $28.3 million. But the LBJ section is likely to handle more traffic.

According to the sponsors’ bid, traffic on I-635, also known as the LBJ freeway, is already at 270,000 vehicles per day and expected to rise to 450,000 vehicles per day by 2020. The route runs through a densely populated portion of the Dallas-Fort Worth conurbation, northwest of downtown Dallas. In comparison, the North Tarrant corridor on I-820 and SH-121 and SH-183 north of downtown Fort Worth currently handles an average of 192,000 vehicles per day and traffic growth projections, though robust, are not as high as on the LBJ.

The LBJ sponsors hold a 52-year concession to build, finance, operate and maintain 16.5 miles (21.7km) of managed toll lanes on I-635 from Luna Road to Greenville Avenue, near the interchange with US-75, as well as on I-35E from I-635 to Loop 12. Alejandro Veramendi, in Cintra’s project finance department, said the grantor has already acquired rights of way, eliminating any right-of-way risk to the sponsors.

All traffic in the lanes will be subject to a dynamic tolling regime, a model comparable to North Tarrant but different from Transurban’s Capital Beltway project, the first PAB to close in the US. LBJ Infrastructure plans to charge motorists initial peak period tolls of $0.45 per mile, a more modest $0.20 per mile during interpeak periods and $0.10 per mile during non-peak hours when the lanes open in 2015. The North Texas Tollway Authority will collect tolls, as it does on the other Cintra-owned concessions in the state. After 180 days of operation, the sponsor will be able to set tolls almost at will as long as the lanes maintain a minimum traffic speed of 50 mph. High occupancy vehicles with two or more occupants will be charged a reduced rate.

Moody’s rated the deal Baa3, one notch below North Tarrant, but did not rate the TIFIA loan. Fitch gave both parts of the financing package a BBB- rating, comparable to the earlier project. However, Moody’s noted that the case for managed lanes running parallel to free general purpose highway lanes in the US has a limited history that could lead to higher revenue volatility for the borrower.

Trinity Infrastructure, a joint venture between Cintra affiliate Ferrovial Agroman (60%) and WW Weber (40%), will build the managed lanes under a turnkey contract worth roughly $2.1 billion. Ferrovial has backed the contract with a $250 million payment and performance letter of credit.

TxDOT issued a request for qualifications on the road in April 2005 and received four submissions from ACS/Zachry, Cintra, Macquarie and Transurban/Fluor. The department issued a request for proposals in September 2007, by which time Macquarie had withdrawn its submission and joined Cintra as an adviser; Transurban/Fluor withdrew in October 2007. The remaining two teams submitted final bids on the project in January 2009 and TxDOT awarded LBJ Infrastructure Group the concession in September 2009.

The LBJ freeway managed lanes project is one of Cintra’s largest US toll road concessions, though now that Texas has turned against privately-operated toll roads, the state will offer little in the way of repeat business. While TxDOT has mulled procuring roads using availability payment-based concessions, the state’s large public toll authorities, including the NTTA, remain the most politically palatable vehicles for road development.

LBJ Infrastructure Group
Status: Closed 22 June 2010
Size: $2.7 billion
Location: Dallas, Texas
Description: 21.7km managed lanes project
Awarding authority: TxDOT
Government contribution: $496 million
Sponsors: Cintra (51%), Meridiam (42.4%) and Dallas Police and Fire Pension (6.6%)
Equity: $665 million (does not include $34 million in existing toll revenue)
Debt: $850 million TIFIA loan and $615 million private activity bond issue
Underwriters: Bank of America Merrill Lynch, JP Morgan, Natixis and Estrada Hinojosa & Company
Financial adviser: Macquarie Capital
Sponsor legal: White & Case (transaction) and Bracewell & Giuliani (local)
Underwriter counsel: Latham & Watkins
Bond trustee: Deutsche Bank
Engineer: Hatch Mott MacDonald
Traffic adviser: Arup
TIFIA legal: Hawkins, Delafield and Wood
TIFIA financial adviser: Montague DeRose/ High Street Consulting Group