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Indiana Road Burdened by Debt Reveals Public-Private Risks

Indianas Truck Shortfall Shows Hazard in Road Deals
The Indiana experience may have ramifications across the U.S. as investors seek to pay less for new toll projects and banks demand more money down. Photo: Frank Polich/Bloomberg

The Indiana Toll Road might have broken even last year with 10.9 million trucks traveling on it. The actual count was less than half of that.

So operators of the 157-mile highway across northern Indiana reported a $209 million loss, excluding some items. It was the fifth straight annual deficit since they paid Indiana $3.8 billion in the largest U.S. public-private road lease deal to date. The venture is meeting its debt obligations only by borrowing more money, and may default before loans mature in 2015, according to disclosures for a 2010 public offering of Macquarie Atlas Roads Group, one of the investors.

President Barack Obama and lawmakers from both parties have proposed expanding public-private partnerships, like the one in Indiana, to close funding gaps for projects governments can no longer afford. The Indiana experience may prompt investors to pay less for projects while banks demand more money down, according to Brad Guilmino, chief financial consultant at HNTB Corp., a Kansas City, Missouri-based infrastructure services company.

“The way our politicians are selling this to us is crazy, as if public-private partnerships are the answer to all of our funding problems,” Norman Anderson, chief executive officer of Washington-based CG/LA Infrastructure LLC, a consulting company, told Bloomberg Government. “If the structure of a deal isn’t good there will always be problems.”

Macquarie Atlas dropped 3.1 percent to A$1.71 in Sydney, valuing the company at A$773.5 million ($806 million) in the steepest share-price decrease since June 2. The benchmark S&P/ASX 200 index fell 1 percent.

Cintra, Macquarie

With public-private partnerships, government agencies work with investors to design, finance, build or operate roads, bridges and other infrastructure.

In a recently announced deal, Puerto Rico said on June 20 that a group led by Goldman Sachs Group Inc. agreed to pay $1.1 billion to operate two toll roads for 40 years and to invest $356 million more for improvements. California, Illinois, Michigan, Kentucky, and Georgia are among states also looking to involve private investors in road and bridge projects.

Deal Structure

Cintra Concesiones De Infraestructuras De Transporte, a unit of Madrid-based Ferrovial SA, and Macquarie Infrastructure Partners, an investment fund managed by Macquarie Group Ltd. of Sydney, jointly won the right to run the Indiana Toll Road after their $3.8 billion bid topped the next closest bid by $1 billion. They each owned a 50 percent stake in Statewide Mobility Partners LLC, the entity created to operate the road.

Crowe Chizek and Co., now known as Crowe Horwath LLP, a public accounting and consulting firm based in Oak Brook, Illinois, valued the road at $1.92 billion at the time using future cash-flow projections.

While Indiana’s toll revenue has almost doubled since the investors took over, it’s still not enough to cover interest expenses, according to Statewide Mobility Partners’ financial statements. A loan default would transfer the road’s operations to debt holders led by the Royal Bank of Scotland, according to the lease agreement.

Macquarie Infrastructure and Cintra put up $760 million in equity and financed the rest through seven banks: Banco Bilbao Vizcaya Argentaria SA of Bilboa, Spain, Banco Santander SA and Caja de Ahorros y Monte de Piedad de Madrid SA, based in Madrid, BNP Paribas S.A. and Dexia Crédit Local of Paris, Dublin’s DEPFA Bank, and RBS Securities Corporation, a unit of the Royal Bank of Scotland, based in Edinburgh.

‘Great Deal’

Macquarie Infrastructure bundled several toll roads, including the Indiana Toll Road, and spun them off last year as Macquarie Atlas Roads Group, a publicly traded company. Indiana’s toll revenue was $164.2 million last year, up from $88 million in 2005, according to Macquarie Atlas Roads, which after the spinoff owns 25 percent of the concession.

By turning the road over to investors, Indiana received an upfront payment and avoided more than $100 million a year in operating costs.

“The state got a great deal for the toll road lease in 2006,” said Jane Jankowski, a spokeswoman for Indiana Governor Mitch Daniels, a Republican. “The lease agreement contains numerous protections for the taxpayer and travelers and ensures the continued successful operation of the road.”

Default Potential

Macquarie Atlas Roads’ 2010 prospectus says revenue from the highway is “expected to remain insufficient to cover debt service obligations over the medium term.”

A $150 million line of credit had about $71.5 million left as of Dec. 31, according to Statewide Mobility Partners’ 2010 financial statement.

“These reserves may be insufficient to support the project until the existing debt facilities mature in June 2015,” the prospectus said. “Should this occur, any default under the loan documents may lead to lender actions which may include foreclosure of the project assets or bankruptcy.”

The banks probably will extend the terms of the loan rather than allow a default, said John Schmidt, a Chicago-based attorney with Mayer Brown LLP who worked on the Indiana Toll Road project.

Should there be a default, the banks would assume the lease and could assign another operator with the state’s approval, he said. If the operating standards of the road deteriorate below parameters set by the contract, the state could take back the road and assume the operating costs, he said.

Statewide Mobility Partners last year spent $114.2 million on operating expenses, ranging from maintenance to toll collecting, according to its 2010 financial statement.

‘Not a Forecast’

The prospectus was prepared in 2009 during the global financial crisis and deals with potential risks, Paula Chirhart, a Macquarie spokeswoman, said in an e-mail.

“It was not a forecast and was never stated as a forecast or an expectation,” she said. “We expect the Indiana Toll Road to continue to meet its debt service payments as they fall due.”

Patrick Rhode, a Cintra spokesman, said more vehicles are using the Indiana road as the economy recovers. The reserve account was created to cover financial gaps that occur over long periods of time, he said.

“Nothing has changed since our last communication to the market and we do not expect a default,” he said in an e-mail.

Toll road operators try to put as little money down as possible and take on as much debt as the banks allow, HNTB’s Guilmino said.

Fingers Crossed

“In this case their revenue projections didn’t pan out because of the economy,” he said. “They’re going to have their fingers crossed that traffic picks up and that financial markets get better.”

About 5 million trucks, or “heavy users,” drive the Indiana Toll Road a year, according to Kendra York, a spokeswoman for the Indiana Financing Authority.

It would have required 5.9 million additional 5-axle trucks traveling the full length of the turnpike and paying a toll of $35.20 each to offset the losses that the lease holders reported last year, according to calculations by Bloomberg Government. The $209 million loss excludes derivative liability. Including the liability, the loss was $260.8 million.

In Ohio, lawmakers are considering a bill that would give Republican Governor John Kasich the authority to seek a sale or lease of the Ohio Turnpike, as the state faces a budget shortfall of as much as $8 billion over two years. Kasich has suggested the road deal might be worth $3 billion.

“Toll roads are extraordinarily stable over the long term but they still have some short term risk from the overall state of the economy and gas prices,” said Schmidt, the attorney who worked on the Indiana project. “I suspect that if and when Ohio goes forward you’ll see bidders who keep that more in mind.”

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