Denver Transit Partners’ closing on the $1.64 billion Eagle P3 rail project signals a growing, if still limited, acceptance of transport public-private partnerships (PPP) in the US. The deal is the coun­try’s first transit project to use an availability-based payment stream in and the financing’s effective combination of private activity bonds (PABs), equity, construction and substantial com­pletion pay­ments is encouraging other tran­sit authorities to look to the ex­ample of the grantor, Denver’s Regional Trans­por­tation District (RTD).

The significance of a transit project being designed, built, financed, operated and maintained outside the public sector in the US cannot be overstated. Every major transit system in the country – the older ones were built by the private sector – has been operated at a loss by public agencies since the 1960s. Transit agencies from Washington, DC to Charlotte, North Carolina and Los Angeles are already looking at RTD’s example for their own burgeoning transit systems.

The 30-year DBFOM Eagle P3 project encompasses 56.8km of electrified commuter rail and a maintenance facility in Denver, Colorado. The project is split into two phases; the first includes the 36.7km East corridor from central Denver to its airport and the maintenance facility, and the second the 11.7km gold line to Arvada and 8.4km northwest electrified rail segment (NWES) to Westminster. It is part of the grantor’s 225km FasTracks transit expansion plan, which is funded with a voter-approved 0.4% local sales tax.

Fluor and Macquarie closed on the $1.64 billion financing package on 12 August 2010. The grantor is providing the bulk of the financing in the form of $1.14 billion in construction and $44 million in pre-completion service payments. The remainder comes from a $397.8 million PAB issue, underwritten by Barclays Capital and Bank of America Merrill Lynch, and $54.3 million in equity. Macquarie sold its 90% equity stake to John Laing (45%) and Lloyds (45%) at financial close. Fluor provided the remainder of the equity.

The PABs closed with an average coupon of 6.078% and a spread of between 217bp and 247bp over the benchmark muni­cipal market data AAA index. They included 14 semi-annual series tranches totalling $80.3 million with yields ranging from 4.85% to 6.13% and maturities between 15 July 2015 and 15 January 2026. The remainder was divided into three term tranches totalling $62.5 million (maturity 2030), $79.97 million (maturity 2034) and $175.1 million (maturity 2041), and yielded 5.9%, 6.08% and 6.13% respectively. The final issue was scaled down from $404 million because of better-than-expected pricing. According to the final term sheet, the debt service coverage ratio on the bonds ranged from 1.56x in 2017 and 2.09x at maturity. Fitch rated the bonds at BBB- stable and Moody’s rated them Baa3.

Moody’s raised the issue of construction and termination risks in its report. It cited the deal’s high reliance on RTD financing during construction – the agency’s sales tax revenue has proven variable since it was implemented – and, in the event of a concessionaire default, the termination amount would be reduced by RTD’s cost of finding another contractor. These issues could significantly reduce bondholder recovery, accord­ing to the agency.

Another issue for the grantor and sponsors to consider is what will happen if RTD does not approve the second phase of the project. The decision is contingent on the receipt of a $1.03 billion federal full funding grant agreement, which the RTD expects in either May or June 2011. If the second phase does not occur, total project costs are estimated at $1.52 billion, with RTD contributing only $599 million in construction payments. According to the final term sheet, the sponsors would have the option to issue an additional $412 million in bonds and contribute another $56 million in equity under this scenario. The grantor would increase the amount of its availability payments to fund the additional debt service.

David Parker, an executive director in the infrastructure group at Fluor, who worked on the project, says that, while the sponsors would have preferred not to have the added com­plexity of the two phases, the project team was “impressed” by the collaborative and cooperative nature of both the grantor and its advisers in structuring the deal. “They [really] rolled up their sleeves and helped solve issues in a constructive way,” he says.

RTD used a PPP for the Eagle project as a way to help close a more than $2 billion budget gap in its FasTracks expansion programme in 2007, and evaluated bids based on speed and best value. Three groups, including DTP, Mile High Transit (John Laing and Hochtief) and Mountain Transit Partners (HSBC and Siemens) submitted statements of qualifications for the project in 2008.

However, as it was originally structured, Eagle could not proceed as a PPP. Tabor, the state’s taxpayer bill of rights, which limits the amount of debt government agencies can raise, re­quired that the availability payments would have to reapproved annually by RTD and, if the contract was terminated, the transit agency would not be responsible for the remaining debt. With these risks, the proposers would not have been able to raise the debt necessary for the project. The deal was restructured by splitting RTD’s obligations into a Tabor portion, which constitutes a subordinated lien over sales tax revenues, and an appropriated portion. This allowed it to move forward and the request for proposals was released in September 2009. DTP and Mountain were the only two respondents – Mile High dropped out that November – and the preferred bidder was announced on 15 June 2010.

A joint venture of Fluor and Balfour Beatty, joined by local contractor Ames Construction, is building the rail lines. Denver Transit Services, a joint venture comprised of Alternate Con­cepts, Balfour Beatty and Fluor, holds the O&M contract. Month­ly availability payments will be made to the project company when service begins. Payments are contingent on oper­ational performance, not ridership or farebox collections.

Denver Transit Partners
Status: Closed 12 August 2010
Size: $1.64 billion
Location: Denver, Colorado
Description: 56.3km commuter line and maintenance facility
Awarding authority: Regional Transportation District
Government contribution: $1.14 billion construction payments and $44 million pre-completion service payments
Sponsors: Fluor (10%), John Laing (45%) and Uberior (45%)
Equity: $54.3 million
Debt: $397.8 million in PABs
Underwriters: Barclays Capital and Bank of America Merrill Lynch
Financial advisers: Macquarie, Goldman Sachs and JP Morgan
Sponsor counsel: Orrick; Kutak Rock
Bond counsel: Sherman & Howard
Underwriter counsel: Mayer Brown
Grantor counsel: Marla Lien and Freshfields
Bond trustee: Bank of New York Mellon
Technical adviser: Arup
Contractors: Fluor and Balfour Beatty
Operations and maintenance: ACI and Fluor
Rolling stock: Hyundai-Rotem