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California P3 Files Chapter 11

MAR 29, 2010 7:16pm ET
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SAN FRANCISCO — After California granted a franchise to build a private toll highway in San Diego County, it took almost 17 years before the 10-mile road opened to the public.

Less than three years later, the South Bay Expressway finds itself in bankruptcy court.

South Bay Expressway LP filed for Chapter 11 bankruptcy last week in the Southern District of California, citing low traffic levels that render it unable to meet its debt-service demands, combined with uncertainty caused by ongoing litigation between the toll-road firm and its primary construction contractor.

The financial failure of one of the two projects to emerge from California’s early 1990s experiments in privatized highways comes as the administration of Gov. Arnold Schwarzenegger continues to promote public-private partnerships. The administration claims nine projects in various stages of the state’s P3 transportation pipeline, with a capital cost of $26 billion.

South Bay Expressway’s bankruptcy filing comes as other greenfield P3 toll roads get underway around the country.

Last week, Florida announced plans to start the process of awarding a concession for a 46.5-mile toll road in St. Johns and Duval counties, and earlier this month Indiana lawmakers approved bills allowing that state’s governor to negotiate with private firms interested in a proposed toll road and a pair of Ohio River bridges.

The South Bay Expressway, according to a declaration filed with the bankruptcy court by chief financial officer Anthony Evans, owes $340 million on its senior loan, arranged by Spanish bank Banco Bilbao Vizcaya Argenteria SA, and owes $170 million to the federal government on a loan issued under the Transportation Infrastructure Finance and Innovation Act.

“The South Bay Expressway project is the first bankruptcy in the history of the 12-year TIFIA program,” Federal Highway Administration spokeswoman Cathy St. Denis said in a statement. “While we will carefully review and learn from this particular case, we remain confident that TIFIA will continue to serve an important role in advancing critical infrastructure projects.”

The expressway borrowed $140 million through TIFIA in 2003 that has grown to $170 million because of capitalized interest, according to Evans’ declaration. Interest payments on the 4.46% TIFIA loan are not scheduled to commence until 2012, and principal payments until 2021.

Contractors have also asserted more than $600 million in claims against the toll road operator, Evans said.

California awarded the franchise for the toll road in January 1991. But construction of the road, which extended State Route 125 to the Mexican border at Otay Mesa, was stalled for years as builders sought environmental permits. The permits came in 2003, shortly after Australia’s Macquarie group acquired a controlling interest in the concessionaire in 2002.

The highway did not open until November 2007 — just in time for the subprime mortgage market to unravel, taking a major toll on the suburban communities the expressway was built to serve.

“In addition, recent traffic flow has been further weakened by a decline in cross-border commercial traffic and a rise in unemployment in the South Bay area,” Evans wrote in his declaration. “As a result, commercial traffic and commuters — the debtors’ target customer base — increasingly choose to travel via free routes that are now seldom congested.”

Macquarie wrote its investment in the toll road down to zero in June 2009, according to a statement issued last week by Macquarie Atlas Roads, which holds 50% of the expressway’s equity.

The road is covering its operating costs, with total revenue in its first full fiscal year of $21 million, resulting in $3 million in earnings before interest, taxes, depreciation and amortization, Evans declared. The expressway remains operational.

The expressway’s ongoing litigation with its prime contractor, Otay River Constructors, also helped cause the Chapter 11 filing, Evans declared. The claims arising from that litigation can now be resolved through the bankruptcy process, he wrote.

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