‘Deal of the year’ for a public private partnership

December 9, 2013

The Bond Buyer has awarded its annual top prize for a muniland deal to a public private partnership (P3) that contracted with the Indiana Finance Authority to build the East End span of the Ohio River Bridges Project:

The Indiana Finance Authority won The Bond Buyer‘s 12th annual Deal of the Year award Thursday night for its Ohio River Bridges East End Crossing Project.

The public-private partnership was funded through the sale of around $675 million of tax-exempt private activity bonds, including $195 million of milestone PABs, a new security type that can serve as a template for other P3 concessions.

The deal — the largest P3 PAB offering completed to date in the U.S. municipal market — ‘financed a large infrastructure project that fulfilled a public need. It was innovative, replicable, and took an immense amount of cooperation across a number of sectors to come to fruition,’ said Michael Scarchilli, editor in chief of The Bond Buyer, when presenting the award at a ceremony held at the Waldorf Astoria hotel in New York City.

The financing structure of the deal was groundbreaking. Here is how the “milestone” payments of $392 million are apportioned (page 60):

But will the unique financing structure deliver a lower cost of construction and maintenance to taxpayers? Louisville Business First wrote about the project:

The Indiana Department of Transportation said WVB’s proposal calls for the East End span of the Ohio River Bridges Project to be designed and built for $763 million — $225 million less than expected — and to be open to traffic by the end of October 2016.

But there are two places that the projected $225 million savings could be eaten up.

First is a higher cost of borrowing. The bond obligor – the consortium – is rated BBB. $675 million was borrowed at a near-junk level, incurring additional borrowing costs of 130 basis points over a AA cost (the Thomson Reuters MMD historical spread estimate for March 2013). The Indiana Finance Authority is rated AA1 and the State of Indiana has a stellar AAA rating. My rough estimate for the additional borrowing cost over the term of the bonds is $204 million.

The second additional cost is the long term “availability” payments that will be made to the consortium to run and maintain the bridge. According to the official statement, the annual “availability” payments made to the consortium will be $33.5 million (in 2012 dollars) with annual escalations based on CPI. The term of the operation and maintenance contract is 35 years, so the cost of those payments will be approximately $1.72 billion. It’s not possible for me to project the cost for the Indiana Finance Authority operating and maintaining the project, but the analysis could easily be done. Were there any savings here?

The combination of these additional costs may or may not make this public private partnership a real savings for taxpayers. The financial risk of the project has been shifted to bondholders since the State of Indiana has no enforceable responsibility to make the milestone and availability payments to the consortium. It likely has a “moral obligation” to make the payments, however. But this risk has been disclosed to bondholders.

I can appreciate The Bond Buyer’s respect for unusual financing structures, but it shouldn’t let novelty carry more weight than the economic value of a deal. After all, The Bond Buyer named the $1.44B financing for the Detroit retirement systems in 2005 the “Midwest Deal of the Year,” and it was a finalist for “Deal of the Year.” Some now believe that the Detroit variable-rate debt and interest-rate swap deal ultimately killed any hope that the city would regain any fiscal recovery.

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