CHICAGO - Ohio next week will launch its first public-private partnership with the sale of $230 million of tax-exempt private activity bonds for a highway through the Appalachians.
It's a high-profile project for the state, which hopes to launch more transportation P3s in the future.
The Ohio treasurer is issuing the bonds on behalf of the Portsmouth Gateway Group, a team of private firms that includes equity partner ACS Infrastructure Development Inc. and contractor Dragados USA, both subsidiaries of the Spanish P3 infrastructure firm ASC.
The deal is expected to price April 1. Moody's Investors Service has assigned a provisional rating of Baa2. The issue will include serial bonds maturing from 2019 through 2024, term bonds maturing from 2025 through 2030, and large term bonds maturing in 2035, 2039, and 2053.
Bond proceeds will raise roughly half of the $553 million price tag for the Portsmouth Bypass project. A federal Transportation Infrastructure Finance and Innovation Act, or TIFIA, loan will contribute another $221 million at a projected interest rate of 1.38%.
The project will create a four-lane, 16-mile highway through the last segment in Ohio on the Appalachian Development Highway System. It will include 22 bridges and five interchanges. Ohio transportation officials say the project will spark development in one of the state's poorest areas.
Ohio originally planned the deal as a traditional design-bid-build project to be built in three stages over 13 years. But it later opted for a P3, saying the agreement is less costly and allows the project to be completed in a single phase over roughly six years.
The state signed a final agreement in December 2014. It's structured as an availability-payment model, a relatively rare model that is growing in popularity for governments. Indiana crafted one of the country's first availability-payment P3 models in 2013 for a $675 million private activity bond deal.
The Portsmouth P3 is a 39-year agreement that includes a 44-month construction stage and 35-year operating period.
The state will make the milestone payments out of existing federal funds from the Appalachian Regional Commission that the state has already stockpiled, according to Adam Sheets, with ODOT's Division of Innovative Delivery, a department the state created in 2012 to ramp up privatization efforts.
The milestone payments will be $14.5 million, $14.5 million and $15 million, and be paid at 70%, 80%, and substantial completion respectively.
Ohio plans to make its availability payments over the 35-year operating period from non-general fund revenues that are part of ODOT's budget. The payments are subject to appropriation by the General Assembly.
The P3 agreement itself needs to be renewed every two years to comply with Ohio restrictions on long-term commitments.
The payments are also structured as senior to all other ODOT payments expect general obligation and Garvee bond payments, Sheets said.
Officials emphasized bondholders' legal protections in the private partnership agreement, including the ability to step in and remedy a problem in the case of default, and a list of specific recoveries in the event of various terminations of the agreement.
Under the agreement bondholders and the developer are not covered if the state fails to appropriate the payments.
In that event, or the event of another state-initiated termination, bondholders and the developer are protected by a lease of the project, according to Charles Williams, attorney with Ashurst LL, counsel for the developer.
"If the PPA ceases to be, the lease survives," Williams said. "If there's the failure to appropriate, the lease mirrors the termination compensation in the PPA even though the PPA is terminated," he said. "For any other termination, the lease also acts as protection to the creditors because it survives until all termination obligations are discharged."
The lease will also help offset any renewal risk that the P3 agreement will face every two years.
Moody's says its provisional Baa2 rating reflects in part the "weak structure features" of the 2015 bonds, including the appropriation risk and two-year renewal risk.
"While we think the structure will perform as designed given the strong governance of the state of Ohio, we do see the structure as negatively influencing our views on the rating," analysts said.
The weak structural features are offset by various restrictive covenants and other requirements of the TIFIA loan, which will govern the borrower, said Moody's. "The rating is tempered by the inexperience of ODOT in PPP, which could result in schedule delays in the initial phases of construction," Moody's said.
"That said, the roughly 28 months between scheduled substantial completion and the long stop date allows plenty of time to mitigate any delays in the earlier stages of construction," according to Moody's.
Payments on the federal loan will remain subordinate to all senior secured obligations under the agreement. But in the case of a bankruptcy, the TIFIA loan automatically will become equal in rank with the senior obligations.
JP Morgan and Barclays are underwriters. Thompson Hine LLP is bond counsel.
