The financing for Skanska and Macquarie’s $2.089 billion Elizabeth River Crossings tolled tunnel concession features the largest private activity bond ever. It also combined new construction and a brownfield asset to mitigate traffic risk.

The project will be a stern test of Virginians’ willingness to pay tolls to private road operators. The brownfield asset was not tolled before the sponsors took it over, and tunnel projects have higher capital costs relative to above ground road sections, making them unusually sensitive to traffic underperformance.

Virginia’s experience with PPP to date has been with turning non-profit roads over to private operators (the Pocahontas parkway), or installing tolled managed lanes on existing interstates (I-495 and I-95). Other states and cities have usually procured additional managed lanes with real toll concessions, new roads and tunnels with availability concessions or non-profit structures, or sold revenue rights for existing assets under long-term concessions.

Indeed, the concession for the tunnels is the most contentious financing so far in Virginia, which has become one of the foremost proponents in the US of using PPP to procure transportation assets. In fact, opposition to the introduction of tolling on the crossings almost derailed the financing.

Skanska Infrastructure Development and Macquarie Infrastructure Partners II each own 50% of Elizabeth River Crossings, which holds the 58-year concession to build a new tunnel between Portsmouth and Norfolk, Virginia, parallel to the existing Midtown tunnel, as well as build an extension to the Martin Luther King Expressway from London Boulevard to Interstate 264. The project company will also take over the operation of, and rehabilitate, the existing Midtown and Downtown tunnels under the Elizabeth river.

The project has a total cost of $2.089 million, of which construction accounts for $1.51 billion, with operating costs accounting for $178 million, interest during construction $218 million, financing costs $67 million, funding debt service and major maintenance reserves $65 million, and a contingency $51 million. The engineering, procurement and construction contractor is SKW Constructors, a joint venture of Skanska (45%), Kiewit (40%), and Weeks Marine (15%), and the new sections are set for completion in December 2016.

In common with most recent greenfield US PPP financings, there is a limited role for commercial banks in the financing. The largest single financing source is a private activity bond issue – the largest ever for a road PPP – with a face value of $664 million, which was three times oversubscribed, and brought in $675 million in proceeds thanks to an original issue premium. The bonds amortise in series between 2022 and 2042, carry coupons of between 4.45% and 5.5%, and have an all-in yield of 5.47%. Barclays Capital, Bank of America Merrill Lynch and BMO Capital Markets led the BBB- (S&P/Fitch) rated issue, which is non-callable for 10 years.

The bonds complement a $465 million (inclusive of $43 million capitalised interest) loan from the Federal Highway Administration under its TIFIA programme. That loan has a tenor of 35 years, includes a ten-year grace period on interest and principal, and only amortises for the last ten years of its life. It has the same rating as the bonds but is priced at 3.18% all-in.

Rounding out the financing is $272 million in equity from the two sponsors, $309 million from the grantor, the Virginia Department of Transportation (VDOT), down from a planned $362 million because of the response to the bond issue, $368 million in toll revenue during construction, and $51 million in contingent equity from the sponsors. The contingent equity involves BMO providing a backstop for Macquarie and Svenska Handelsbanken one for Skanska.

The small proportion of the financing coming from senior debt (the TIFIA debt is subordinate in its cashflow position) gives the lenders considerable comfort, as does the limited geological risk (the presence of existing tunnels). VDOT has paid $100 million to the project company to defer the imposition of tolls on the road until January 2014, saying that savings in construction and financing costs will allow it to subsidise the delay. When Hampton Roads residents start paying tolls the ultimate test of the financing structure will have arrived. 

Elizabeth River Crossings OpCo LLC
Status
Closed 13 April 2012
Size
$2.089 billion
Description
Real toll concession for construction of new tunnel and freeway extension, and rehabilitation of two existing tunnels, in Virginia’s Hampton Roads region
Grantor
Office of Transportation Public-Private Partnerships, Virginia Department of Transportation
Government contribution
$309 million
Toll revenue during construction
$368 million (VDOT has since replaced some of this with a subsidy)
Sponsors
Skanska (50%), Macquarie Infrastructure Partners II (50%)
Equity
$272 million
Debt
$675 million in private activity bonds and $468 million TIFIA Loan
PAB bookrunners
Barclays , Bank of America Merrill Lynch and BMO Capital Markets
Sponsor LC providers
BMO (Macquarie); Svenska Handelsbanken (Skanska)
TIFIA lender
US Department of Transportation
Bond trustee
Deutsche
Grantor legal adviser
Nossaman
Grantor financial adviser
KPMG
Grantor O&M adviser
Halcrow
Grantor rights-of-way adviser
OR Colan Associates
Sponsor financial adviser
Macquarie Capital
Sponsor legal adviser
Orrick, Herrington & Sutcliffe (lead); Hunton & Williams (local)
Sponsor traffic consultant
Steer Davies Gleave
Sponsor technical consultant
AECOM
Sponsor insurance adviser
Aon
Sponsor public affairs adviser
McGuireWoods
Sponsor environmental consultant
ERM
Sponsor systems adviser
PBS&J
Bookrunner legal adviser
Dewey & LeBoeuf
Bookrunner technical and traffic consultant
Arup
Bookrunner insurance adviser
Marsh
TIFIA financial adviser
Scully Capital
TIFIA legal adviser
Katten Muchin Rosenman
EPC contractor
SKW Constructors (Skanska 45%, Kiewit 40%, Weeks Marine 15%)
Tolling contractor
Federal Signal Technologies
Design
Parsons Brinckerhoff,
Volkert & Associates, COWI, Transdyn, Systems Support