Regional News

Indiana Floats $641M of PABs for Ohio River Bridges Project

CHICAGO — The Indiana Finance Authority comes to market next week with $641 million of private activity bonds that mark the first major financing for a $2.6 billion bi-state project to build two new bridges spanning the Ohio River.

The IFA borrowing also represents the state’s first public-private partnership structured with availability payments.

Indiana debt officials are heading to New York and Boston this week for investor road shows promoting the bonds.

Fitch Ratings assigned a preliminary BBB rating to the debt, contingent on receipt of final legal documents and the pricing of the bonds, analysts said. Standard & Poor’s had not released a rating as of Tuesday.

Proceeds will be loaned to WVB East End Partners LLC, the company that is designing and building the Ohio River Bridges on both the Indiana and Kentucky side. The team is led by Chicago-based Walsh Construction.

The borrowing will cover the bulk of Indiana’s share of financing for the project. A piece of the proceeds will fund a debt-service reserve account. The issue is set to price Tuesday.

The Ohio River Bridges project is a long-planned effort by Kentucky and Indiana to address transportation needs and congestion in the area, as well as promote economic development.

It involves construction of two new bridges across the Ohio River, one linking downtown Louisville and Jeffersonville, Ind., and another upriver.

The states have pushed for the project for decades. They finally broke ground last August, even as the states continued to select final construction teams and nail down financing details. The bridges are now expected to be open by 2017.

The project is unique as the two states have opted for different financing models. Kentucky is pursuing a traditional design-build model that relies on toll revenue, grant anticipation revenue vehicle bonds, state funds, and potentially a federal loan. Financing for the project is managed by the Kentucky Public Transportation Infrastructure Authority, which expects to sell between $350 million and $700 million of toll-revenue bonds in the next few months, according to a transportation spokesman. Kentucky estimates its costs will exceed $1 billion.

Indiana, under former Gov. Mitch Daniels, a big proponent of public-private partnerships, opted for a P3 model. The Hoosier State has repeatedly turned to P3s for infrastructure projects — most notably the 2008 $3.8 billion Indiana Toll Road lease — but this is the first time the state has used an availability payment structure.

“We believe that this project was really perfect for an availability payment structure given the appetite in the private market for risk-sharing,” said Indiana debt director Kendra York. “That was one of our primary goals — risk sharing with the private sector — and we were proven right on that, as shown by the huge savings.”

The state announced at the end of 2012 that the final agreement with WVB East End Partners would shave $225 million from the original estimates, bringing the total cost down to $763 million.

York said the project is vital to southeast Indiana.

“This project will provide the basis for some pretty incredible economic development in southeastern Indiana,” she said. “We are very excited about the prospects of that.”

The private activity bonds will be backed by annual payments from Indiana to the company. The debt will be paid with so-called milestone payments through 2020 and then by availability payments for the 35-year life of the project, roughly through 2050.

Both payments feature an appropriation pledge from triple-A rated Indiana, the state’s strongest available pledge as it does not issue general obligation bonds.

The $641.4 million deal is divided into two series: $445.4 million of Series A bonds and $196 million of Series B.

The Series B bonds are backed by the state’s pledge of milestone payments and the Series A bonds feature a pledge of the availability payments.

York said the final maturity of the Series A bonds would be uncertain until pricing. In its rating report, Fitch said that debt service on the A bonds is interest-only through 2033, with a final maturity of 2050.

Bank of America Merrill Lynch is senior underwriter. JPMorgan, Goldman, Sachs & Co. and RBC Capital Markets are co-seniors. Barnes & Thornburg LLP is bond counsel.

York, who is traveling to the East Coast Thursday and Friday to promote the deal to investors, said she plans to highlight the strong pledge from Indiana backing the debt.

“These bonds are secured by the appropriation credit of the state of Indiana, which is a very strong credit,” the debt director said. “Ultimately it’s the strong state of triple-A rated Indiana’s credit.”

Fitch Ratings also noted the state’s strong credit as well as relatively low-risk operations due to the experience of the construction team, WVB.

Preliminary bond documents, however, feature 14 pages of risk factors for bond buyers. Many of the factors relate to the P3 agreement.

Risks include appropriation risk if the Indiana General Assembly fails to appropriate debt service, the limited nature of the state’s obligation, and increased operating and maintenance costs.

The company’s operation and maintenance costs are senior to debt service on the bonds, according to bond documents. The state is allowed to withhold some of its payments to the firm to offset its own losses if construction costs rise or the bridge-opening is delayed.

“Under the agreement, if a portion of the bridge were unavailable to use, we could offset or reduce the availability payments,” York said.

That could protect the state but not bondholders, as any withholding of payments could impair debt payments.

The agreement requires WVB to make operation and maintenance payments on the bridge for the 35-year term of the deal.

Fitch also lists several risk factors, including construction delays that boost expenses and lower debt-service coverage levels, and “considerable deterioration of financial counterparties leading to a weakening in the financial performance of the project,” Fitch said.

Analysts project debt-service coverage levels of 1.2 times to 1.4 times, adequate for a triple-B rating category.

Milestone payments are expected to total $392 million through 2020, or $54 million annually, with the IFA issuing an additional $162 million of short-term debt in 2019 to cover a final payment.

Availability payments are expected to total just under $33 million annually, with part of it pegged to the consumer index.

Both bridges will have tolls, with rates that are yet to be set. The state’s revenues will flow into the Indiana Department of Transportation’s budget, York said. The toll revenue is considered separate from the P3 agreement and bond issue.

The Ohio River Bridges project is one in a series of P3s Indiana is launching to cover state transportation needs. The state is also planning a P3 for the so-called Illiana Expressway, a shared project with Illinois, and Interstate 69 in Bloomington.

“We’ve established here in Indiana our reputation and ability for looking to not only P3s but innovative ways to make use of P3s,” said Will Wingfield, a spokesman for INDOT. “We want to continue to build on the success and momentum that we built with this project.”

Shelly Sigo contributed to this story.




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