News+: The return of the PABs


The recent financial close for the US$940 million Virginia HOT Lanes P3 may have marked the return of the US private activity bond (PABs) market for transportation P3s.

The US$245 million bond offering led by JPMorgan late last month received strong investor interest, and is encouraging for future transportation P3s in the US, said one banker involved in the project. The offering was sold on 26 July  in two tranches - one due in 2034 and the other in 2040.

The 2034 offering offered a yield of 4.35 per cent, while the 2040 tranche yielded 4.45 percent. The spread for both tranches was 215 basis points over custom Municipal Market Indices. Barclays Capital and RBC served as joint bookrunners. The Fluor-Lane 95 consortium, consisting of Transurban USA Operations and Fluor Corp., won the bid for the project in late 2011. Scotiabank served as the advisor to the consortium.

One banker involved in the I-95 deal said “After the financial crisis in 2008 in which banks were facing liquidity crunches, I think everyone was kind of running scared. That was compounded by reports that the Indiana Toll Road and Chicago Skyway consortiums were losing money, which didn’t help. The dust seems to have settled now, and investors are viewing the US and Canadian infrastructure markets as perhaps the strongest markets out there.”

However despite strong investor interest for PABs in the case of the Virginia I-95 the banker noted that other major deals in the North American transport market in the past year have favoured bank debt, but was quick to add that this had nothing to do with whether the bonds would have sold. The US$1.15 billion lease deal for Puerto Rico’s PR-22 and PR-5 toll roads  in 2011 and the US$364.7 million Presidio Parkway deal in California were both financed by bank debt.

The banker said, “Last year, the PR-22 and PR-5 would have most likely not gotten the cost of capital that Puerto Rico was looking for had it gone to the PABs market. In the case of Presidio, I think that their thought process was that the deal was too small to justify a PABs issue. I don’t think it had anything to do with whether they could have sold bonds.”

The state of Virginia also saw a US$663.75 million PABs issue in April for the US$2.1 billion Midtown Tunnels deal, which is led by a consortium consisting of Skanska and Macquarie. The PABs issue for the Midtown Tunnels deal also carried a 215 bps spread.  Barclays Capital, Bank of America Merrill Lynch and BMO were joint book runners on the offering.

Another banker who worked on the Midtown Tunnels deal said that current market conditions are encouraging for PABs issuances to finance US transportation deals. “It’s impossible to really predict what the market will look like in the next six months, especially with the upcoming Presidential election. That being said, we saw the AMT tax exemption repealed in 2010, but that didn’t seem to matter in terms of getting investor interest in PABs. The US market is very hot this year,” said the banker.

The AMT Tax exemption gave tax breaks on interest payments paid to money managers from bond issuers.

Another banker on the Midtown Tunnels deal said “Issuing over US$900 million in PABs so far in 2012 (for US transportation projects) after two years of virtually no PABs issues shows the resilience of the US infrastructure market.  This should be very encouraging for deals in the pipeline right now such as SH 183  (in Texas) and the Goethals Bridge replacement. The fact is that 215bps spreads are very tight considering that we’re still feeling the effects of 2008.”

Prior to this year, the last P3 transportation deal that included a PABs issuance was the US$1.2 billion Chicago Parking Meterslease project in 2009, in which Morgan Stanley, Barclays Capital and Credit Suisse  issued US$600 million in senior secured notes that were similar in structure to corporate bullet bonds and carried a spread of 300bps.

One P3 deal maker predicted that the US P3 infrastructure market will see more transportation deals using PABs. “We got three major transportation P3s done so far this year. I think the passage of the MAP-21  long-term transportation funding and the subsequent increase in the TIFIA program  to US$1.7 billion from US$120 million will expedite projects and provide funding for more projects. Keep in mind, however, that the US is notoriously slow when it comes to closing projects.”

PABs pricing comparison

Project

PABs amount issued

Spread

Year

Chicago Parking Meters

US$600 million

300bps*

2009

Midtown/Downtown/MLK Extension (Virginia)

US$663.75 million

215bps**

2012

Virginia I-95 HOT Lanes

US$245 million

215bps**

2012

* Spread to Comparable US Treasuries
**
Spread to custom municipal market bonds