Project company WVB East End Partners closed on $676.8 million in private activity bonds (PABs) on to support construction of a new bridge over the Ohio River, linking Indiana to Kentucky. That issue, which closed on 28 March 2013, is the largest-ever for an availability-based. Fitch and Standard & Poor’s rate the issue BBB. WVB is a consortium of Walsh, Vinci and Bilfinger Berger, combining European PPP players with a US construction firm.

The universe of investors buying PPP-related debt is expanding, and ratings agencies consider the state of Indiana a strong counterparty, with S&P rating Indiana AAA. The state, prior to the WVB financing, had issued significant amounts of debt that featured appropriations risk, but the East End Crossing project was Indiana’s maiden greenfield PPP concession.

The Indiana Finance Authority (IFA) looked at other availability-based deals in the US, including the $1.64 billion Eagle P3 rail project in Denver, which closed in 2010, and the $363 million financing for the second phase of the Presidio Parkway in San Francisco, which closed last year. But Presidio Parkway lacks a tunnel, unlike the East End Crossing, and Eagle is a transit project. Eagle featured a PAB issue, while Presidio ended up using a combination of commercial bank and TIFIA debt.

East End Crossing, which connects Indiana and Kentucky, had to cope with risks that included climate and seasonability, which will shape how and when the concessionaire can build the bridge. WVB must be sensitive to potential flooding on the river. Winters in Indiana can be harsh, and snow is not uncommon. Then there’s the spring: the Indiana bat tends to mate in trees in the spring, discouraging their removal during that season.

Bank of America Merrill Lynch led the deal, with JPMorgan, Goldman Sachs and Royal Bank of Canada also helping to underwrite the issues. Scotiabank was financial adviser to WVB. The bond issue supporting East End Crossing increased from $641.4 million at launch, though it was short of the $697 million in a financing plan that emerged in late 2012. The PABs consist of $482.3 million in Series A bonds and $194.5 million in short-term Series B bonds, down slightly from $484 million and $213 million, respectively. The long-term Series A bonds essentially extend for the expected length of construction – projected at 43 months – and the term of the 35-year concession.

Most of the notes have coupons of 5%, though the short-term notes yield 2.28% and the Series A bonds – which mature between 2035 and 2051 – have yields of between 4.56% and 5.10%. The PAB issue for Eagle closed in August 2010, and consisted of series with an average coupon of 6.078% and a spread of between 217bp and 247bp over the benchmark municipal market data AAA index

Under S&P’s base case, the issue has an average debt service coverage ratio (DSCR) of 1.41x and a minimum DSCR of 1.27x. The debt amortises over the life of the issue, but debt service is interest-only until the end of 2033 on the Series A notes, according to Fitch. The issue includes a debt service reserve account of $11.9 million. Interest on the PABs will be payable each year on 1 January and 1 July.

WVB and the IFA were contractually obligated to close the debt financing within three months of commercial close. The IFA selected WVB as preferred bidder in November, three weeks after receiving final bids, and then reached commercial close on 27 December 2012, about two weeks before the end of Mitch Daniels’ term as the state’s governor; Daniels’ administration helped move the project forward and had wanted to reach commercial close before his departure. WVB then launched and closed the issue of PABs in March.

According to WVB’s bid, the East End Crossing will cost about $763 million, or 23% below the IFA’s early projections. WVB beat three other shortlisted bidders for the concession: East End Mobility Partners, comprised of SNC-Lavalin, John Laing, Zachry and Tutor Perini; Ohio River Mobility Group, composed of ACS, Hochtief, Skanska, Flatiron and Dragados; and Ohio River Transportation Partners, which features Balfour Beatty, Kiewit and Traylor Bros.

The WVB sponsors will contribute $78 million in equity to East End Crossing. The IFA and the Indiana Department of Transportation will repay the short-term PABs with some of the $392 million in payments that it will make to the project during construction. The availability payments are partially linked to the consumer price index (CPI), with 80% of those payments increasing by 2.5% per year, and the balance indexed to CPI. Under the concession agreement, the state had assumed interest rate risk for the municipal bond offering by reimbursing the project for 90% of potential changes in credit spreads between commercial and financial close, with WVB absorbing the remaining 10%.

WVB plans to start construction on the East End Crossing in May. The cable-stayed bridge will complete an interstate loop around Louisville, Kentucky, by connecting the Gene Snyder Freeway in Kentucky to the Lee Hamilton Highway in Clark county, Indiana. Kentucky is overseeing a separate bridge over the Ohio River, dubbed the Downtown Crossing, for northbound Interstate 65 traffic. Walsh will also build that bridge, though under a more conventional procurement method. Its winning of both crossings, stress market observers, was purely coincidental. WVB East End Partners
STATUS
Closed 28 March 2013
SIZE
$763 million
DESCRIPTION
A design-build-finance-operate-maintain concession for the new East End Crossing over the Ohio River
SPONSOR
Consortium of Walsh (33.3%), Vinci (33.3%) and Bilfinger Berger (33.3%)
DEBT
$676.8 million
UNDERWRITERS
Bank of America Merrill Lynch (lead), JPMorgan, Goldman Sachs and Royal Bank of Canada
SPONSOR FINANCIAL ADVISER
Scotiabank
GRANTOR LEGAL ADVISER
Nossaman
SPONSOR LEGAL ADVISERS
Mayer Brown and Bingham Greenebaum Doll
UNDERWRITER LEGAL ADVISER
Latham Watkins
BOND COUNSEL
Barnes & Thornburg