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Virginia Sets Another P3 to Collect Tolls on New Lanes

WASHINGTON — The Virginia Small Business Financing Authority will price $262.3 million of bonds on behalf of 95 Express Lanes LLC next week, financing that is expected to combine with a $300 million federal loan to finance one of the state’s biggest public-private partnerships.

The nearly $1 billion 95 Express Lanes Project is one of the Virginia Department of Transportation’s “mega projects,” and the commonwealth has entered into an agreement with 95 Express Lanes allowing it to collect toll revenue from managed pay lanes on 29 miles of what are currently medians between Interstates 95 and 395.

The private investment group, owned mostly by Transurban Group and Fluor Corp., will be allowed to collect the toll revenue for about 73 years after ­operations are expected to begin in 2015. Transurban is the majority owner of the DRIVe USA Investments LLC fund, which incorporated in January to undertake the project.

JPMorgan, RBC Capital Markets and Goldman, Sachs & Co. will underwrite the deal. Hunton & Williams LLP will serve as bond counsel and Winston & Strawn LLP will be underwriters counsel.

The VSBFA, run by the state’s Department of Business Assistance, was created in 1984 as part of the Virginia Small Business Financing Act. It serves as a statewide issuer of industrial development bonds, as well as the conduit issuer that provides assistance to Virginia’s businesses on deals like the upcoming bond sale.

The debt is the form of private-activity bonds issued under a program in which the U.S. Depatment of Transportation has authority to allocate $15 billion of PABs to support P3 transportation projects. The allocations are not subject to state volume caps. As of June, $7.5 billion had been allocated and $2.8 billion issued, according to a DOT fact sheet.

Fitch Ratings and Standard & Poor’s have each announced that they expect to rate the 95 Express Lanes bonds BBB-minus. The debt is backed by toll revenues paid by drivers seeking to avoid the congestion of standard lanes.

The agencies cite the high demand for the heavily-congested corridor outside the nation’s capital and strong debt-service coverage as positive factors.

However, Standard & Poor’s adopted a revenue forecast that predicts only 60% to 70% of toll revenue forecast by the project sponsors, while Fitch expressed concern over the limited history of such lanes and uncertainty about what toll levels would be appropriate.

The project will utilize “dynamic” tolling that will adjust the cost of using the express lanes based on real-time traffic conditions. There will be no pre-set maximum toll rates.

“As a managed-lanes project, it is exposed to traffic-volume risk if congestion on the free general-purpose lanes does not generate sufficient demand for the managed lanes,” S&P analyst Matthew Hobby wrote.

“Given the limited operating history of managed lanes, there is uncertainty associated with the optimal toll rate related to the assumed time savings,” according to Fitch’s analysis. “However, aforementioned strong demographics should support the assumed moderate-to-high toll rates.”

The express lanes will be high-occupancy toll lanes, free to buses and carpools with at least three occupants, but charging tolls to other users.

“Although the I-95 HOT Lanes will not be the first HOT lanes in Virginia, HOT lanes are still relatively new to the public, and public resistance or antagonism at having to pay what could be a relatively high toll to avoid heavy congestion on the general purpose lanes or other routes could lead to public opposition and political pressure,” the preliminary official statement reads.

The project also makes use of the reversible-lanes concept, an increasingly utilized strategy aimed at relieving congestion by providing the express lanes in the direction of rush-hour traffic. The I-95 corridor in Northern Virginia is a major commuter thoroughfare and one of the most congested corridors in the Washington metro area.

Travel along the project’s route can take more than 80 minutes during peak travel times, compared with to fewer than 25 minutes during off-times, according to the POS.

The project will set specific times designated for traffic in each direction, and all vehicles entering the express lanes will need to be equipped with an electronic transponder. Carpooling vehicles will need a certain type of transponder but will not be charged a toll.

The express lanes will also operate in sections, each of which can set tolls at a different rate. Commuters will have the chance to exit the express lanes prior to entering the next section and being required to pay the toll.

The ratings also reflect the expectation that the project will borrow about $300 million from the federal government through its Transportation Infrastructure Finance and Innovation Act program, a loan that will be secured by a secondary lien on toll lane revenues.

The terms of the P3 agreement provide some protection in the event that the TIFIA loan does not come through in the full amount, including heavier commitments from both the public and private partners. Fitch also expects to assign a BBB-minus rating to the TIFIA loan.

The bonds and TIFIA loan represent more than half of the proposed financing for the project, but the new lanes will also rely on more than $300 million of capital contributions and $64 million from a public funds account.

Cash-flow projections provided in the preliminary official statement show total interest of just under $47 million on the project, of which about $38 million will be paid on the bonds and about $9 million on the TIFIA loan.

The deal represents the latest development in Virginia’s ongoing push to establish itself as a premier environment for public-private partnerhips.

Gov. Bob McDonnell’s office announced last month that the commonwealth would seek to operate the Port of Virginia as a P3 after the DOT received an unsolicited proposal. Shortly after that, the governor’s office announced a “pipeline” of more than 20 projects eligible to operate as P3s.

The state obtained more than $1 billion in bond and TIFIA financing in April for the Elizabeth River Crossings Project, a P3 in southern Virginia, earlier this year. The project also earned a BBB-minus rating, and was the first public rating of a P3 in Standard & Poor’s history.

That deal fell slightly short of expectations, as PAB yields ranged from 4.45% with a 4.25% coupon and a maturity in 2022 to 5.5% with a 5.5% coupon and a maturity in 2042.

The maturity of the private-activity bonds for the express lanes deal will be about 27 years, and the TIFIA loan will have a 35-year maturity from the substantial completion of the project.

The TIFIA loan will not close with the bond deal, but is expected to be executed late this year or in early 2013. The loan must come through by March 31 of next year in order to avoid triggering the contractual protections in the deal.

In that case, Fitch estimated that the Virginia Department of Transportation would have to provide around $218 million and the equity sponsors would provide about $114 million in additional funding.

Closing on the bonds is expected July 31.

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