Finally, a year and half after it reached commercial close California’s star project, the Presidio parkway, has reached financial close. The pathfinder endeavour, which has presented itself as the infrastructure equivalent of a summer blockbuster has had more than its fair share of hurls. In fact, the project as any good thriller, has been quite the nail-bitter.

The procurement process has been long and hard but a strong commitment from the public and private partners proved that in the end any obstacle can be beaten and deals like this can and will get done, at least in California.

Project history

The project came about as a joint effort from the San Francisco County Transportation Authority (SFCTA) and the California Department of Transportation (Caltrans). Originally the two-phase project was tagged at US$954 million.

In 2010 as it was structured the second phase of the project was pegged as a potential public-private partnership (PPP) after the state legislature enacted one of the most significant transportation bills to hit California in the last 20 years.

California had previously engaged in a primitive form of PPP when it successfully closed the South Bay Expressway toll road project to an SPV-led by Macquarie known as California Transportation Ventures (CTV). However, the deal went belly up to some unwise risk transfer from the public to the private sector and unclear contracts that drove up costs. This led the concessionaire to file for Chapter 11 of the bankruptcy code in March 2010 and finally the project was bought back by the public sector.

Therefore if the new administration led by former Governor Arnold Schwarzenegger wanted to tap into private dollars to fund transportation projects, changes needed to be made. One of the changes included structuring the Presidio Parkway project under an availability-based payment model. Another important change related to California’s legislation on the matter.

As a result the Senate Bill 4 (SBX2 4), successfully passed by the California legislature near the end of the second extraordinary 2009-2010 session and was signed into law by Governor Schwarzenegger on 20 February 2009.

SBX2 4 authorises Caltrans and regional transportation agencies (RTAs) to enter into PPPs for transportation projects via comprehensive development lease agreements until 31 December 2016. It defines transportation projects as highway, public street, rail, or related facilities supplemental to existing facilities currently owned and operated by Caltrans or RTAs. SBX2 4 does not limit the number or location of PPP projects that Caltrans or RTAs can pursue. However, Caltrans and RTAs must nominate candidate PPP projects for approval by the California Transportation Commission (CTC).

As such the SFCTA and Caltrans also submitted the project to the state’s Public Infrastructure Advisory Commission (PIAC), which also pegged a list of potential PPP’s the state could venture into. Public officials at the time liked to call PIAC’s list “California’s emerging PPP pipeline”. Another project included in the list was the General Desmond Bridge, which the industry sadly saw it converted into a design/build model.

By January 2010, Caltrans and the SFCTA were ready to issue an RFQ though they had not yet submitted the project to CTC for approval. According to California regulation the procurement process can start before approval is granted, but the authority may not issue an RFP until it is properly green-lighted.

By April that same year, three teams had submitted SOQs for the project which included:

• Golden Gate Access Group: ACS Infrastructure Development, CH2M Hill, Dragados USA, CC Myers and Iridium Concesiones De Infraestructuras
• Golden Link Partners: Hochtief PPP Solutions North America, Meridiam Infrastructure, HNTB Corporation, Flatiron West and Kiewit Pacific
• Royal Presidio SF Partners: Global Via Infraestructuras, Parsons Transportation Group, Royal Presidio SF Constructors, FCC Construccion, Tutor Perini Corporation, Corporacion Financiera Caja de Madrid and Fomento de Construcciones Y Contractas

Within a month the project was granted its CTC approval and thus could move forward with an RFP.

This also meant that the appropriations risk inherent to availability payments had been mitigated by establishing and committing future state budgets, which need to be passed by the state legislature on an annual basis, to set aside the funds necessary for their payment. The payments were then pegged at c. US$34 million annually for the 30-year concession.

As final proposals by all three developers were due in September 2010, the US Department of Transportation (USDOT) also pre-selected the project for a loan guarantee under the Transportation Infrastructure Finance and Innovation Act (TIFIA) program that would leverage the private money influx.

By October that same year Caltrans and SFCTA selected Golden Link Partners as preferred bidder for the project. However, the deal was just about to get interesting.

From CC to FC: A year-and-a-half in the making

Nearly as soon as the preferred bidder was announced the Professional Engineers of California Government (PECG) a public union that protects engineers working for Caltrans, started voicing their disapproval of the deal.

According to the PECG the PPP would:

• abandon competitive bidding and double the cost of the project
• would cost the Bay Area 15,000 jobs
• pile millions of dollars in new debt on California taxpayers
• take money away from other transportation projects for the next 30 years

As such a Californian state judge in December 2010 agreed an injunction on the state signing the contract on the deal.

The plot thickens.

Notwithstanding, Governor Schwarzenegger and the former Secretary at California Business, Transportation and Housing Agency, Dale E. Bonner assured the industry the state would close the deal  before they left office. Incumbent Governor Jerry Brown was ready to take over by January 2011 so time was pressing.

True to their word, early January, days before the administration change, Caltrans and the SFCTA reached commercial close with Golden Link Partners just after a state judge lifted the temporary injunction.

Little did they know of the trouble that ensued.

Shortly after it reached commercial close the authority was sued by PECG, which put the project on hold.

The sponsor aimed for a bank debt structure.  But at the time due to pending litigation banks were not willing to commit just yet though interest in the project remained very high. Therefore, bonds were never taken off the table as a possible back up plan.

Financial close had been expected by the summer of that year and the contract did have a get-out clause. However, commitment on both sides kept the deal alive. Caltrans successfully negotiated an extension of the contract, which included a Transportation Investment Generating Economic Recovery (TIGER) grant of US$30 million. With this the contract now had an extension valid until 29 June.

Even though there had been a change in administration in which Republicans lost the governorship to Democrats, it seemed everybody in the public sector was willing to pull their weight and the private sector was willing to stay put and work with them.

By August 2011 San Francisco's 1st District Court of Appeals issued a unanimous decision saying the pathfinder project could move forward. The decision was taken at record speed and by November, the California Supreme Court denied PECG an appeal against the project.

Given this ruling the private partner was now eligible to move forward with financial close.

Financial close: Full details

There were several factors that affected the final tally on this transaction.

In order to secure the cheapest debt package, the sponsors innovatively opened up a debt competition and approached several banks.

Simultaneously, the authority secured the TIFIA loan.

In terms of equity, this deal was unique in the sense that ACS, a bidder for one of the losing teams bought a majority stake in Hochtief in June 2011, completing a nine-month-long takeover bid. ACS, which had been the biggest shareholder in Hochtief, now holds 50.16 percent of voting rights in the company, up from a 43 percent.

The sponsors, Golden Link Partners, put in US$45.6 million of equity on a 50:50 basis and debt:equity ratio was set at 87.5:12.5.

A US$150 million TIFIA loan from the US DOT is unusually split into two tranches, a US$89.8 million short-term tranche priced at 0.47 per cent with a tenor of 3.5 years and a US$60.2 million tranche with a tenor of 31 years to match the concession, priced at 2.71 per cent. As usual the benchmark for any TIFIA loan is the US Treasuries.

After the debt competition five banks agreed to provide US$166.6 million in three-year construction debt. They are:

• The Bank of Tokyo-Mitsubishi UFJ  (BTMU)
• Compass Bank, dba BBVA Compass  (BBVA)
• Bank of Montreal, Chicago Branch (BMO)
• Sovereign Bank, N.A. (Santander)
• Bank of Nova Scotia (Scotiabank)

The bank debt has a swap rate of 2.535 per cent with a maturity of 3.5 years. Several market insiders have mentioned that it is particularly interesting to note that notwithstanding the Eurozone crisis, European banks still take the lead on PPP transactions in the US as opposed to American banks.

In total the financing of the project resulted in:

• bank construction loans: US$166.6 million
• short-term TIFIA loan: US$89.8 million
• long-term TIFIA loan: US$60.2 million
• private equity: US$45.6 million
• total financing required: US$362.2 million

On completion of construction, Caltrans and the CTA will make a milestone payment of around US$173 million to the sponsors, which will pay down the bank debt.

Financial close was reached on 14 June 2012.

This completed the financing for Phase 2 only, which is the PPP part of the project. Phase 1, which was procured under a traditional public works model is already finished. Both phases bring the total project costs to c. US$1.1 billion.

Advisors

KPMG and Sperry Capital were financial advisers to the authorities, Nossaman was legal adviser and Parsons Brinckerhoff and Arup provided technical advice to the SFCTA.

Scotia Capital was financial adviser to the sponsors, Millbank, Tweed, Hadley & McCloy was legal adviser and TSIB was insurance adviser.

Bank Advisors included LeighFischer as the lenders’ technical advisor, Moore-McNeil as the insurance advisor and Orrick, Herrington & Sutcliffe served as legal counsel.

Advisors for the US DOT TIFIA Program Office were Bryant Miller Olive as legal counsel and Montague DeRose and High Street Consulting as financial advisors.

Project Description

The 30-year availability-based DBFOM project will see a six-lane 1.6 mile (2.58km) road and a southbound auxiliary lane built replacing the existing Doyle Drive on Route 101 in San Francisco. It will link the Park Presidio Interchange and the new Presidio access at Girard Road. The route serves as the southern access to the Golden Gate Bridge, along the northern edge of San Francisco. Construction is due to complete in 2015.

The future

PIAC still has several projects on its list that could be potential PPP’s. However, it is expected that Caltrans will have a supporting role in future transactions and the lead will have to be taken from local RTA’s. A clear example of this trend are the LA Metro projects that seem to be up-coming stars.

The Presidio Parkway project was unique in the sense of the level of commitment that both the private and public sector brought to it. Both partners created a marriage of sorts that truly took to the good and bad of the process and in the end waged every battle triumphantly. It was this level of commitment that not only brought the project to financial close but has also opened up the Californian market as a new PPP contender for future projects.

One other aspect worth noting- the developer is required to accept the completed works of traditionally built Phase 1 and be required to operate and fully maintain for concession life. This aspect will set the stage for some future interesting comparisons on quality, schedule and cost control between the two projects.

As for the deal, the good guy won and got the girl.