Better Luck This Time: Analysts Optimistic on Indiana Toll Road

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CHICAGO — The Indiana Toll Road is about to begin its second go-round under a private operator.

Months after the original private owner of the publicly owned toll road went bankrupt, the new owner, Australian fund manager fund IFM Investors, is set to complete the financing of its takeover bid next week.

This time, conservative traffic projections, a fresh debt structure and generous toll-raising ability will be key to IFM's success, according to ratings analysts from Standard & Poor's and Fitch Ratings, who held a pair of webcasts on Wednesday outlining key risks and rewards for investors in the project.

IFM bought the rights to the Indiana Toll Road lease in May for $5.7 billion, marking the largest price tag for an existing U.S. and the first time that major U.S. pension funds have invested in American infrastructure.

The fund took over the remaining 66 years of the original 75-year lease after concessionaire ITR Concession Company LLC, a subsidiary of Macquarie Infrastructure Partners, Macquarie Atlas Roads and Cintra, declared bankruptcy last September.

The original concessionaire took over the toll road in 2006 after paying the state of Indiana $3.8 billion, the largest privatization to date at the time.

The 157-mile Indiana Toll Road is a key link between the Chicago area and the East Coast. Competition from other roads is limited, and the concession agreement requires Indiana to keep it that way, or compensate the concessionaire in the event any competing roadway is built within 10 miles of the toll road over the life of the lease.

Fitch and Standard & Poor's both have assigned preliminary BBB ratings to the debt, which will be issued by IFM subsidiary ITR Concession Company LLC.

ITR is expected to sell $1 billion of senior secured notes on July 15.

The notes will be structured as non-callable bullet maturities in 10, 15, 20, and 25 years.

The new debt will be on top of $700 million of senior secured private placement notes, $829.4 million of a five-year term loan facility, and $328 million of capital expenditure term loan facility.

In addition to the roughly $2.5 billion of debt, IFM Investors used $3.3 billion of equity to complete the acquisition.

There are several differences between the original 2006 financing and the new deal that make the new financing more likely to succeed, analysts said.

The original deal featured swaps that became a major liability to the concessionaire post-2008, as well as overly optimistic traffic projections that suffered in the recession.

"Overall we see this structure as stronger than the previous one," Standard & Poor's analyst Dhaval Shah said. "Considering the assumptions we put into our base case, we feel the rating is warranted with this structure and leverage," Shah said.

"Our growth assumptions are different and more conservative," added S&P analyst Anne Selting. "The overall debt to capital is less aggressive than the original transaction."

Key strengths are a favorable concession agreement, provisions that restrict taking on additional debt, and reasonable debt service coverage levels, analysts at both firms said. Key risks include refinancing risks and declines in traffic and toll revenue projections.

Among the most generous provisions in the lease agreement is flexibility on raising tolls, analysts said.

The lease allows for tolls to be increased by the greater of inflation, the percentage change in nominal GDP per capita, or 2%. ITR is also allowed to raise rates on some segments of the driving population, such as truck drivers, and not others.

Fitch said its base case scenario projects a 4.5% annual toll revenue growth rate. ITR needs a 2.25% total revenue growth rate to maintain at least 1.0 times coverage on its debt, according to Fitch.

"When we think about the traffic characteristics of the ITR, we also think about the flexibility the concessionaire has on the tolling mechanism," Fitch analyst Casey Cathcart said during a Fitch webcast on the deal. He said Fitch's projections feature a "more or less reasonable revenue growth assumption that we feel is achievable over a long period of time."

ITR's leverage is key to Fitch's analysis, said Saavan Gatfield.

"The main driver of the rating is leverage of the five- to 10-year projection period," Gatfield said. "There's more uncertainty surrounding longer-term assumptions. We acknowledge that if traffic does perform weaker than anticipated, then the concessionaire has the ability to manage its leverage profile, so it should have the flexibility to respond," he said. "So while of course the longer-term projection is important, it's important mostly for refinancing risk rather than the current rating."

Analysts consider debt-service coverage ratios a key measure in analyzing the financing. S&P notes its "base case" scenario puts minimum debt service coverage at 1.31 times, in 2020. That's only slightly above a 1.3 times minimum coverage level, below which the ratings agency could downgrade. "It's a triple-B credit, but it doesn't have a lot of headroom," said Selting.

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