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Is TIFIA Tapped Out?

WASHINGTON - The current financial crisis that has caused Treasury rates to plummet has created a boom in demand for a 10-year-old federal program that offers low-interest loans, pegged to Treasury rates, to transportation departments and private investors. But there is no longer enough funding in the TIFIA program to meet the growing demand, according to transportation experts and market participants.

As lawmakers try to find cures for infrastructure financing woes, Congress may increase the amount of financing authority available under the Transportation Infrastructure Finance and Innovation Act program, sources said in recent interviews.

The program is coming up short of funds because Congress rescinded about $257 million of its carry-over budget authority during the last fiscal year, which ended on Sept. 30, when TIFIA was not fully subscribed. Because the budget authority constitutes only a small portion of the financing that would be available, the program potentially lost more than $2 billion of total financing capacity, at a time when it was about to become one of the least expensive methods of financing transportation projects.

"The unfortunate timing of this year is that more applications began to come in, and some of these large projects were clearing the development phase and getting ready to get financed, when TIFIA budget authority was rescinded," said Bryan Grote, co-founder of Mercator Advisors LLC and the former Transportation Department official who headed the TIFIA program from its inception until August 2001.

Sources said it is likely that Treasury rates will eventually bounce back from their recent lows, which could possibly slow demand for TIFIA financing by comparison to traditional debt such as municipal bonds. But in the meantime, said Jack Basso of the American Association of State Highway and Transportation Officials, "We've all of a sudden achieved nirvana, and there's no money there."

TIFIA, enacted in 1998, provides credit assistance to transportation projects that have a dedicated revenue stream. It was designed to fill in project funding gaps and to leverage private investment with subordinate capital. Prospective borrowers come from across the spectrum of project finance and construction participants, including private companies, state and regional transportation and port authorities, and state and local governments.

The allure of TIFIA financing comes from its low interest rate - 3.09% yesterday - that is pegged to the Treasury rate, and from the fact that TIFIA loans are subordinate to other senior obligations such as bank loans. But it has become so attractive in recent months that is now oversubscribed, sources said. The program has nine pending applications currently, but only $110 million that it can use to make credit available this year.

"Historically, TIFIA has had funds available to support all worthy projects, so we can provide no example - yet - of a project we've turned down for lack of budget authority. However, the project list ... represents demand far in excess of our resources and we'll need to prioritize our credit support," said Department of Transportation spokeswoman Nancy Singer.

Under TIFIA agreements, the federal government can provide a direct federal loan to project sponsors, a loan guarantee to institutional investors such as pension funds that make loans for the projects, or standby lines of credit as a secondary funding source that can be drawn upon to supplement project revenues during the first 10 years of project operations.

The program has provided $8.05 billion in financing support for highway, transit, and intermodal projects in the decade since it was launched.

TIFIA is currently providing about $3.27 billion of credit for highway, transit and intermodal projects backed mostly by user charges. Another $516 million toll-backed loan was committed in December to the Intercounty Connector linking Prince George's and Montgomery counties in Maryland.

The TIFIA program has budget authority of $122 million, Singer said. But that amount is likely to be reduced through the appropriations process to about $110 million for the current fiscal year, she said. That budget authority, which pays for the subsidy cost of making a TIFIA loan, is calculated for each transaction but generally amounts to about 10% of the overall financing.

More than $1 billion of TIFIA financing was distributed in 2008 for the Capital Beltway HOT lanes project in Virginia, and the SH130 project, a 40-mile portion of tollway in central Texas. TIFIA had to commit about $154 million to support the loans, which is equivalent to a private bank setting aside a set percentage of total loan amounts.

The DOT has committed to providing financial help for another three projects under TIFIA, pending the completion of state solicitations or negotiations, and has an additional six applications pending.

"In addition to Capital Beltway HOT Lanes, Pocahontas/Richmond Airport Connector and LA-1, projects that likely would not have been financed but for TIFIA participation include the South Bay Expressway ... the Central Texas Turnpike, 183A, and the Reno ReTRAC," Singer said.

The volume of TIFIA applications will either remain at current levels or grow more dramatically, "considering the backlog of major investments and the fact that more state and local sponsors are looking more to tolling and other user-backed facilities," Grote said.

The question being asked by market participants is whether TIFIA's authorization volume will be increased, or whether technical tweaks will be made to the program to facilitate more financing ability going forward.

The House Transportation and Infrastructure Committee has not recommended any changes to the TIFIA program as part of the economic recovery legislation being crafted by Congress, said the committee spokesman Jim Berard.

Sources believe the committee could try to augment the program in the next transportation funding law to replace the Safe, Accountable, Flexible, Efficient Transportation Equity Act: a Legacy for Users, which expires Sept. 30. But Berard said it is too early to predict what, if anything, the committee will do regarding the program.

TIFIA advocates said the committee also should consider making some of the TIFIA provisions less restrictive. One provision states that although TIFIA is subordinate to other project debt on a cash-flow basis, it is no longer subordinate if the borrower becomes insolvent.

"That makes it a little more problematic if you have a borderline project where there is some risk of having default or repaying project debt down the road," Grote said. It also dilutes the ability of TIFIA to enhance senior debt, he said.

Another provision limits TIFIA to financing only 33% of the total project cost, but Grote pointed out that other federal credit programs are allowed to lend up to 80% of project costs.

"In the current market environment, the TIFIA credit looks even more useful than even I expected," Grote said.

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