DALLAS – A $1 billion project to clear congestion on a major Houston corridor will raise $272 million through a tax-exempt private activity bond sale this month.
The bonds are expected to price the week of April 25 through Citigroup and Barclays. Estrada Hinojosa & Co. is financial advisor.
The PABs are expected to be issued at a premium, raising up to $300 million in proceeds.
Created through a concession agreement with the Texas Department of Transportation, the issuer, the Texas Private Activity Bond Surface Transportation Corp., is an international consortium.
The project developer, Blueridge Transportation Group LLC, is made up of engineering and finance firms from Israel and Spain.
The 52-year concession agreement is the first in the Houston area to use a private contractor to design, finance, build, operate and maintain a toll road. The Harris County Toll Road Authority operates most toll roads in the area, along with toll road authorities in Fort Bend and Brazoria County. The Texas Department of Transportation created a public-private partnership for the Grand Parkway toll road that encircles the Houston metro area.
Under the contract, Blueridge will develop tolled lanes and general purpose lanes for a 10.3-mile segment of State Highway 288 from U.S. 59, near Midtown Houston, south to the Harris County line.
The Blueridge partners include ACS Servicios y Concesiones, SL, InfraRed Capital Partners Ltd, Shikun & Binui Concessions USA, Inc. and a team of local and national construction and design industry firms.
The Texas Transportation Commission awarded the project to Blueridge on Feb. 26, 2015. The award was the first major U.S. project for the Israeli construction firm Shikun & Binui, which opened its first U.S. office in 2012.
With construction beginning this year, the project is expected to reach completion in early 2019. A conventional process would take much longer to complete, officials said.
Financing includes a $356.8 million Transportation Infrastructure Finance and Innovation Act loan from the federal government. The developers bring $386 million of private equity to the deal.
As is common in public-private partnerships of this type, the PABs carry the lowest investment grade ratings of Baa3 from Moody’s Investors Service and BBB-minus from Fitch Ratings. The agencies called the ratings provisional.
“Upon a conclusive review of the final structure and documentation, we will assign definitive ratings,” Moody’s said. “A definitive rating may differ from a provisional rating if there are material changes from what has been reviewed to date.”
Moody’s analyst John Medina said the project is expected to generate sufficient revenue to support the debt and withstand downside scenarios.
“The rating is constrained by the high leverage that is primarily supported by revenues collected from the northern half of the road,” he wrote. “Therefore, the leverage per mile is higher relative to other projects and more reliant on revenues collected on only half of the road.”
Fitch said the rating reflects the project's “relatively narrow but adequate” debt service coverage ratio.
“The sustained period of tight DSCRs in the early years is mitigated by the project's good liquidity position, notably a $66 million ramp-up reserve account that is only partially drawn,” Fitch analyst Daniel Adelman wrote.
While Fitch expects one-to-one debt service coverage in the first eight years of the project’s life, revenues are likely to grow to 1.92 times debt service over the first 33.5 years.
Moody’s said the ratings “are tempered by the uncertainties surrounding the traffic and revenue forecast, especially given the project's unique tolling regime and the direct competitive presence of the free established general purpose lanes that run parallel to the managed toll lanes along the corridor.”
Managed lanes are a relatively new asset class in the United States and there is very limited performance data on which to calibrate projections, Medina wrote.
“The revenue growth assumptions reviewed in the sponsor's base case appear to be optimistic and Moody's has sensitized and stressed the assumptions accordingly,” Medina wrote.
The $66 million ramp-up reserve provides liquidity during the initial years post construction, protecting the project from material downside scenarios for several years, analysts said.
Toll rates will be set according to a fixed time-of-day schedule that can be changed once per week during the initial three months after opening and once per month after that.
SH 288 is a major corridor that carries commuter traffic between the Texas Medical Center and the suburbs in Brazoria and Fort Bend counties. The Texas Medical Center calls itself the world’s largest concentration of medical facilities.
During peak periods, traffic hits bottlenecks where multiple lanes merge at on-ramps.
“In Fitch's view, these pinch points will largely drive pricing power in the project's early years,” Adelman said.
Work on SH 288 comes as contractors continue construction of the Grand Parkway, designed as a 180-mile outer loop of the Houston metro area. The beltway is considered the third ring around the urban area of 6.7 million people.
Two sections of the Grand Parkway that intersects with Interstate 45 north of Houston were completed last month at a cost of $1.1 billion. The loop has been divided into 11 separate segments for construction and funding purposes.
For the private equity partners on the SH 288 deal, the risk of building a toll project through a heavily traveled corridor is seen as less than that of State Highway 130 near Austin, which recently went into bankruptcy.
The SH 130 Concession Company that built and operates the Austin tollway filed for Chapter 11 reorganization March 3 after months of negotiations with creditors made up of international banks.
San Antonio-based Zachary Construction Co., which is building sections of the Grand Parkway, was a partner with Spanish toll road developer Cintra on the SH 130 project. The $1.35 billion project designed as a high-speed truck bypass of the congested Interstate 35 that cuts through the heart of Austin did not develop as much traffic as was expected in the first several years of operation.
By contrast, the Houston SH 288 credit ratings “reflect the projected solid demand potential for the project's managed toll lanes given the traffic congestion along the northern half of the project corridor at present coupled with the supportive economic indicators within the service area that should continue to spur traffic growth in the region over the long term,” according to Moody’s.
