Dozens of US road and bridge projects have struggled to raise financing, in the face of constraints on the ability of the federal government to support big-ticket construction, and its preference for other types of construction. The American Recovery and Reinvestment Act of 2009 pumped billions of dollars into US transport projects, but much of that money was allocated to resurfacing efforts.

A new congressional act looks like coinciding with several states and muncipalities warming to the merits of public-private partnerships. On 6 July Congress passed the Moving Ahead for Progress in the 21st Century Act, or MAP-21, which will allocate $750 million to the Federal Highway Administration’s TIFIA programme for fiscal year 2013 and $1 billion the year after. Those allocations will support an expected $17 billion in federal loans and potentially $50 billion of transportation and transit projects.

“Many public sector sponsors [grantors] are facing a similar constellation of factors: budget constraints, the need to deliver large projects and public concern about tolling or increased taxation,” says Chris Voyce, a senior managing director at Macquarie Capital.

Before MAP-21 passed, some market observers thought that Congress would maintain the TIFIA programme’s annual allocation of $122 million, but Congress instead significantly exceeded that amount. The allocations dwarfed the $300 million in funding that the National Surface Transportation Infrastructure Financing Commission of 2009 advocated.

Up to the end of August 2012, TIFIA had approved 27 projects, though not all approved projects have moved forward. It has provided 9.2 billion in assistance, including a $150 million loan for the new Presidio Parkway approach to the Golden Gate Bridge in San Francisco, which closed in June 2012. Presidio is one of 11 projects that are PPPs. “Clearly in the last five years, every PPP that’s surface transportation related has had TIFIA participation,” says Chris Bertram, the US Department of Transportation’s assistant secretary for budget and programmes and chief financial officer in Washington, DC. “That’s the flexibility that the financing gives you.”

A programme in flux

An expansion to TIFIA was not the only option. President Barack Obama championed a national infrastructure bank, while some officials campaigned for a rise in the federal tax on petrol. Neither plan mustered a consensus. “There was a sense of, ‘Why fix something that’s not broken?’” says Young Lee, a partner at Orrick, Herrington & Sutcliffe in New York. “Let’s sink money into something that’s working, but clearly needs improvement.”

MAP-21 introduces reforms to the TIFIA programme. It strips TIFIA and its parent, the Federal Highway Administration (FHWA), of a subjective selection process. TIFIA previously fielded competitive solicitations each of the last three years, prompting about 30 applications annually for three to five slots, Bertram says. TIFIA will be allowed to make contingent commitments to project grantors if projects reach financial close within three years of an agreement, according to Nossaman. Grantors planning private-public partnerships could also apply for such commitments before procurements start.

Sponsors certainly will welcome early TIFIA commitments. Take the Interstate-95 toll project in northern Virginia, which involves expanding and upgrading 46.6 km of existing high-occupancy lanes. Project sponsors Transurban and Fluor closed on $253 million in private activity bonds for the $925 million project and issued a notice to proceed in August 2012, yet TIFIA has yet to formally commit, despite being linked to the project for several years. The sponsors and the Virginia Department of Transportation (VDOT) expect TIFIA to contribute $300 million by November, but if the federal programme ultimately rejects the project, VDOT will have to fill most of that void.

The new TIFIA programme will emphasise creditworthiness and institute rolling admissions. If the programme lacks funds when a project qualifies, qualifying projects would receive funding from a succeeding congressional allocation. “The Obama administration has taken great pains to replace policy criteria with credit criteria,” says a person familiar with the legislative process.

Some critics wonder if TIFIA will try to direct funds to regions such as the Midwest and South, where few deals have closed to date. USDOT is conscious of geographic diversity, but will look to promote the merits of the programme in those regions rather than prioritise proposed projects from those regions. “It’s incumbent on us to do good outreach,” Bertram says.

Others wonder if states with established PPP regimes, including Virginia and Texas, will find it easiest to exploit the increased funding. “PPPs are strongest in jurisdictions that are more stabilised, where agencies look to PPPs to solve their long-term needs,” says a banker in New York. “These jurisdictions have the political will and authority to impose it.”

TIFIA, which is now a nine-person office, will need to bulk up. It may soon be inundated with applications – and MAP-21 requires TIFIA to determine, within 30 days of delivery, whether applications are complete and to rule on a completed application within 60 days of that determination. “The challenge for TIFIA will now be to deploy the increased resources it has been provided with, while growing staff numbers and maintaining credit standards,” Macquarie’s Voyce says. TIFIA will look to hire project finance professionals as it ramps up staffing to as many as 30, Bertram says.

Still, observers worry that TIFIA officials will feel pressure to rapidly churn out project financings, as some agencies did after Congress enacted the American Recovery and Reinvestment Act. “TIFIA needs to ensure that weak projects are well-structured to ensure repayment or they shouldn’t get funding,” says Cherian George, managing director in Fitch’s infrastructure and project finance group in New York.

Tappan Zee a contender

Although MAP-21 eliminates discretionary selection, cities and states are still furiously lobbying for favoured projects. Some of these projects are replacement bridges in the industrial Northeast and Midwest; others are road extensions in growth communities in Virginia and the South. Several have lingered for years, if not decades.

“There is enormous pent-up demand for infrastructure and by extension TIFIA financing,” says Adam Sherman, head of SMBC’s public and infrastructure finance group in New York. “In this economy where consumers (really rate- or toll-payers) are so stretched, it is very hard for large projects to be self-supporting. TIFIA financing serves as gap funding, which is accessible and can fit into bank and bond capital funding stacks.” Municipal authorities that have “large capital budgets and very large capital upkeep needs” mostly cannot support these projects, he adds.

Bankers, advisers and lawyers expect that a replacement to the tolled Tappan Zee Bridge in New York will be a beneficiary of the tweaked TIFIA programme. The White House has made it one of 12 projects to benefit from faster federal permitting and environmental review. The $3.5 billion Columbia River Crossing, linking Vancouver, Washington, and Portland, Oregon, won a spot on that list in August 2012.

The Tappan Zee runs 4.8km over the Hudson River, linking Westchester and Rockland counties. More than 138,000 vehicles cross the bridge each day, far beyond its intended limit, according to the New York State Thruway Authority. Its accident rate is double that of the rest of the 923.8km Thruway, which runs through the state north of New York City. And there are no lanes or hard shoulders for emergency or disabled vehicles. George Pataki, New York’s governor from 1995 to 2006, wanted a new bridge in 1999.

Since then, New York agencies have held 430 public meetings to consider repairs or a replacement, according to the Thruway Authority, considered roughly 150 concepts and spent $88 million. Over the past decade, maintenance alone on the Tappan Zee has cost $750 million. Andrew Cuomo, New York’s governor since 2011, favours a bridge with eight traffic lanes, hard shoulders, a bus lane, a walkway and a bikeway, as well as sensors providing real-time data on traffic and road conditions.

In recent months, residual doubts over the Thruway Authority’s ability to replace the bridge have faded. Congress passed MAP-21. The state released a final environmental impact statement for the estimated $5.2 billion project. Three consortiums of contractors bid on the replacement’s design-build contract. And the New York Metropolitan Transit Council, a regional council of governments that takes in the lower Hudson Valley, New York City and Long Island, approved the replacement, a prerequisite to receiving and spending federal transportation funds.

New candidates from new rules

Besides the Tappan Zee, other prime bridge candidates for TIFIA 2.0 support include: the $1.6 billion successor to the Goethals Bridge, which would connect New York’s Staten Island to northern New Jersey; the $1.3 billion East End Crossing, connecting Indiana and Kentucky; and the $1.08 bill Knik Arm toll bridge in Alaska. Like the Tappan Zee replacement, the new Columbia River Crossing is slated to be a design-build contract, while the Goethals, Ohio River and Knik Arm projects are expected to be availability deals.

The backlog of federal bridge projects is not a recent development. USDOT, in 2001, deemed a quarter of the country’s spans either structurally deficient or functionally obsolete. Other projects that are likely to compete for TIFIA financing include the Interstate-70 express lanes project in North Carolina, the Northwest Corridor along Interstate-75 in Georgia and a highway across Maine. Transportation and transit projects in Arizona, Pennsylvania and Washington may also seek funding.

In July 2012, the FHWA approved the financing, management and tolling plans for the East End Crossing over the Ohio River, prompting the Indiana Department of Transportation to issue its final request for proposals. A TIFIA loan is expected to help finance the project, alongside $775 million in private activity bonds and sponsor equity, with the Indiana Finance Authority issuing the PABs on behalf of the sponsor. New York State has filed a letter of intent with Ray LaHood, secretary of the DOT, applying for TIFIA funds for the Tappan Zee replacement.

In August, the Knik Arm Bridge and Toll Authority filed a letter of interest with USDOT for a $500 million TIFIA loan. The August filing replaces a November 2011 request for $308 million TIFIA debt. The authority submitted a new request because MAP-21 increased the size of TIFIA debt that qualifying projects can borrow, from 33% to 49%. And it changed the make-up of financings. TIFIA debt will soon be able to exceed the amount of senior debt if the combined debt obtains an investment-grade rating.

The Knik Arm toll bridge may also benefit from a lower interest rate than the authority expected, as an estimated 78% of the project’s lane miles cuts across rural areas. MAP-21 added a rural component to the TIFIA, enabling projects in rural areas to snag an interest rate half of the standard TIFIA rate, which currently stands at about 2.9%.

While grantors welcome these changes, they serve to dampen the effects of the expansion in TIFIA funding. “The government should want to leverage as little TIFIA as possible,” Macquarie’s Voyce says. Fredric Kessler, a partner at Nossaman in Los Angeles, notes that larger TIFIA shares of project debt packages may limit the number of benefiting projects.

Why sponsors love TIFIA

Project sponsors often pair TIFIA financing with bonds or bank debt, as well as equity. TIFIA loans, which are typically subordinate in cash flow to senior debt, have tenors up to 35 years and are typically priced close to the US government’s cost of borrowing. If a loan is problematic, the secretary of the DOT has the discretion to amend troubled loans; delayed amortisation – potentially up to 90% of the interest – is possible. “No commercial bank would offer those types of terms,” says Fitch’s George.

Sponsors recently have favored bonds over bank tranches for road and bridge projects, particularly long-dated PABs, which have compensated for poor bank appetite. “PABs are favoured by many developers due to the long tenors available,” says Voyce, noting that 30-year BBB- issues are trading at 4.5% yields. “Long tenor bank debt is no longer available, however, banks still have a significant role to play in providing bridging finance to completion payments or take-out financing.” Says Fitch’s George “We’re in a low-yield climate. Deals are being oversubscribed, particularly for managed-lanes projects, because of investor desire for some yield.”

Bond investors are generally comfortable with the risk. Toll-backed debt enjoys a long track record, though some investors are increasingly wary of traffic forecasts. The TIFIA-supported South Bay Expressway entered bankruptcy after anticipated growth in the eastern suburbs of San Diego failed to materialise. The lenders, including USDOT, Depfa and BBVA, eventually sold the road to the San Diego Association of Governments.

But despite the troubles of South Bay and the Pocahontas Parkway, an underperforming Virginia toll road, TIFIA has largely escaped scrutiny. TIFIA debt typically becomes pari passu with commercial lenders in the event of a default. This should address concerns, which emerged during the bankruptcy of Department of Energy-backed solar panel manufacturer Solyndra, that government lenders took a subordinate position to commercial lenders. TIFIA plans to enhance scrutiny on projects that are planned for communities where population growth is still speculative.

Sponsors and government were not always so enthusiastic about TIFIA funding. Changes to the relative costs at which banks and the US government borrow have been major factors in its success.

Congress launched the programme in the late 1990s with the eponymous Transportation Infrastructure Finance and Innovation Act of 1998. On 1 January of that year, 30-year US Treasuries carried a yield of 5.81%. Exactly two years later, the rate had climbed to 6.66%. Even with a subordinate cashflow position and generous amortisation schedules, sponsors struggled to find a use for the product. At the inception of TIFIA, subordinate toll road revenue bonds had a yield roughly 100bp lower, notes David Klinges, a managing director for public finance investment banking at Piper Jaffray in New York.

After hovering at 4-5.2% between February 2006 and November 2008, 30-year Treasuries slipped below 3%, before stabilising at 3.7-4.7% between April 2009 and July 2011. But since, Treasuries have mostly tumbled. On 24 August, the rate for 10-year notes stood at a tantalising 2.79%. “Around 2005, Treasuries just became the better rate,” Klinges says. Indeed, TIFIA’s popularity is largely rate-driven. “A big question is: will TIFIA rates still be good in four years?” Klinges says. “Rates may determine the use of the programme.”