Virginia's I-495, or Capital Beltway, HOT lanes PPP - designed to ease congestion on one of the US' most jammed-up arteries - ran into a financing jam of its own at the end of 2007.

The fact the deal made it to close at all is testament to creative thinking from the participants, combined with the perseverance to carry out a bond financing in the absence of a monoline market.

The deal was worth almost $2 billion, with funding coming from three sources - none of which was project finance senior debt in the traditional sense.

To supplement a grant from the state government and a loan from the US Department of Transportation (USDoT), sponsors Fluor and Transurban decided on a bond issue - the first time Private Activity Bonds (PABs) had been used in a US transport deal. But then the monolines collapsed.

The project

The project entails the construction of four general purpose lanes, the conversion and upgrade of four existing lanes into high-occupancy toll (HOT) lanes and the upgrade of 11 interchanges along the Capital Beltway over a five year construction phase.

The improvements will transform the capital beltway into a 12-lane road, with four un-tolled lanes in each direction, and two in each direction which are free for vehicles occupied by three or more people.

The scale of the project is reflected in the 75-year concession following construction, to allow the sponsors to recoup the expense incurred in building the new lanes.

Such a long concession brings with it its own uncertainties - and so the state of Virginia has agreed to take some downside risk if toll revenues are significantly less than expected, in return for a share of the upside - to a maximum of 30 per cent of revenue - if the project generates excessive returns.

The state's willingness to supplement revenue if multi-occupancy proves more popular than expected is testament to its commitment to the HOT concept - ensuring the project provides no disincentive to car-pooling to avoid paying the tolls.

There is no competing facilities clause in the contract, but the sponsoring JV will have first refusal on any expansion of the HOT lane facility on the I-495.

The financing

Fluor and Transurban say the deal demonstrated "creative structuring, persistence to overcome obstacles as financial markets unravelled, and diligence to achieve closing as credit standards ratcheted up and project finance banks withdrew from the market", and it's hard to disagree.

Although around half of the financing was taken care of through a government grant from the state of Virginia, worth US$409 million, and a USDoT Transport Infrastructure Finance and Innovation Act (TIFIA) loan of $588 million, coming up with the rest was a trickier proposition entirely.

After a US$350 million equity contribution, from Transurban (90 per cent) and Fluor (10 per cent), the deal still needed US$589 million before it could close. The sponsors went for Private Activity Bonds (PABs), the first time they'd been used since their approval by the US Congress in 2005.

It was the collapse of the monolines that prevented financial close being reached in December 2007 - but by that point the deal's participants had hit on the solution. Financial adviser Depfa Bank agreed to provide a Letter of Credit to guarantee the bonds, and Goldman Sachs provided a forward purchase agreement to underwrite the bonds.

Depfa needed to find more banks to participate, and by the time the bond financing closed in June 2008 it was guaranteed by four banks, as follows:

• Depfa Bank US$300m
• Espírito Santo Investment US$114m
• National Australia Bank US$100m
• Bank of Nova Scotia US$75m

Conclusion

On the face of it, Fluor and Transurban's perseverance with bond financing looks bloody-minded - it's certainly been an unfashionable route to take in 2008.

Having decided that Private Activity Bonds were the best way forward, however, they didn't let the lack of monolines stop them. They arranged with financial adviser Depfa Bank a unique Letter of Credit route - with Depfa putting its money where its mouth was - that was likely more palatable to banks than having to lend in the traditional route.

Any US PPP reaching close is a notable event - and this US$1.9 billion, 80-year deal was more notable than most. Let's hope the sponsors are right in describing it as a "pathfinder deal which significantly advanced the US PPP market."

The Project at a Glance

The project at a glance