Two lead sponsors of the North Tarrant Express 3 managed lanes project in Texas have already closed a groundbreaking private activity bond issue for a section of the same road. In December 2009, Cintra and Meridiam closed on $1.05 billion in debt for an earlier phase of the NTE, relying on uncovered PABs as a hook to finance the project instead of using then-dominant commercial banks.

NTE Mobility Partners 3

STATUS

Closed 19 September 2013

SIZE

Roughly $1.5 billion

DESCRIPTION

Design-build-finance-operate-maintain concession for managed lanes project in Fort Worth, Texas

SPONSORS

Cintra (50%), APG (26%), Meridiam (14%), and Dallas Police & Fire Pension System (10%)

UNDERWRITERS

JPMorgan, Bank of America, Barclays and Estrada Hinojosa

TRUSTEE

Deutsche Bank

TRAFFIC CONSULTANT

AECOM

US DOT ADVISER

Taylor-DeJongh

INDEPENDENT TECHNICAL ADVISER

Hatch Mott MacDonald

The financing was just the second-ever issue of PABs for a US toll road, and it proved that banks no longer had a stranglehold on PPPs in the US. Most sponsors of managed lanes PPPs since have opted for PABs, which offer longer maturities and complement loans from the US Department of Transportation’s TIFIA programme. The two sponsors opted for a similar structure for North Tarrant Express 3 – and with the same two underwriters, JPMorgan and Bank of America.

On 19 September 2013, project company NTE Mobility Partners 3 closed the financing for the North Tarrant Express 3A design-build-finance-operate-maintain concession. The overall financing includes a $531 million TIFIA loan, $274 million in private activity bonds (PABs), $412.9 million in equity, and $414 million in government contributions.

JPMorgan, Bank of America, Barclays and Estrada Hinojosa led the issue of PABs, which has a face value of $274 million but priced with a 7% coupon at a slight discount to par to yield 6.875%. NTE initially hoped for a coupon of 7.125%, but investor interest prompted a slight tightening. The Texas Private Activity Bond Surface Transportation was the conduit issuer for the PABs, and will lend their proceeds to the project company. The NTE bonds carry a higher coupon than recent issues of PABs, including the Interstate 95 and Midtown Tunnels PPPs, which also featured traffic risk.

The combined debt package carries ratings of BBB-/Baa3 (Standard & Poor’s/Moody’s). The 35-year TIFIA loan, while subordinated in terms of cashflow, features a springing lien that would make it pari passu with the PABs in the event of a default. The TIFIA loan is drawn at close, but has a grace period on interest payments of five years, and can defer interest payments for another five years after that, with principal repayments only taking place from year 30.

The PABs broke down into two tranches, with maturities of 25 and 30 years, which achieved oversubscriptions of 2.5x and 4x, respectively. The PABs include a 12-month debt service reserve account, a $20 million major maintenance reserve, and a 12-month forwards and backwards distribution test of 1.3x debt service coverage ratio.

The project company’s shareholders are Cintra (50%), APG Infrastructure (26%), Meridiam Infrastructure North America Fund II (14%), and the Dallas Police & Fire Pension System (10%). APG, a Dutch pension fund, was not an original sponsor of the project company for the first instalments of North Tarrant, but bought part of Meridiam’s stake in 2012.

NTE won the 3A concession ahead of three other shortlisted bidders: B3 Connect, a consortium of Balfour Beatty and Brisa; Itinere Infrastructure, comprising Sacyr and Parsons; and OHL. The 3A concession attracted solid interest despite worries in the market – perhaps misplaced – that there is insufficient equity for US projects with demand risk. “Assets that make economic sense that solve real problems will get equity and debt,” says Carlos Ugarte, director at Cintra in Madrid.

NTE’s 43-year concession will start from the date the highway opens to traffic, which is scheduled for mid-2018. Segment 3A entails building two new managed lanes along 10.5km of Interstate 35W in Fort Worth, Texas, to an interchange with Interstate 290. NTE also will manage tolling along Segment 3B, which the Texas Department of Transportation will build, and will run from the IH-820 interchange to US 287.

The two new managed lanes will use dynamic tolling, with pricing determined according to demand, but upgrades to the existing lanes will be toll-free. The managed lanes have “projected high demand potential,” says Moody’s, noting the “all-day traffic congestion along the corridor.”

Still, there are signs that investors might be getting nervous about traffic risk on US toll roads. The two earliest TIFIA borrowers – South Bay Expressway and Pocahontas Parkway – have struggled, and another Cintra-sponsored project in Texas, the SH130 sections 5 and 6, is also coping with poor ramp-up. The post 2008 recession explains much of recent traffic weakness. The sponsors will hope that the recent US recovery will feed through into toll road performance.