CHICAGO – Indiana and its private partner on the troubled Interstate 69 road project are scrambling to overcome new fiscal hurdles.

An investor call is scheduled Thursday for holders of $244 million of junk-rated private activity bonds after a fresh round of downgrades that put the bonds deep in speculative-grade territory.

The 21-mile project, already beset with construction delays and cost disputes, faces new headaches after the collapse of a Jan. 25 memorandum of understanding involving the developers and their equity sponsor, the state government, and design-build contractor Isolux Corsan LLC due to financial troubles of Isolux’ parent.

The MOU was expected to ease pressures on the project by settling various disputes, providing additional funding, and pushing off a project completion deadline, but Isolux’ ability to meet its $52 million equity commitment is now in doubt.

The failed pact prompted Fitch Ratings and S&P Global Ratings to drop further into junk the Indiana Finance Authority bonds issued in 2014 on behalf of I-69 Development Partners LLC for the I-69 Section 5 project, and heightened pressure to find a long-term solution.

The S&P rating now sits at B-plus with Fitch at B-minus.

The IFA and state are not on the hook for bond repayment, which is the sole responsibility of the developer.

“The builder's inability to meet the funding requirements of the MOU is a clear setback to the troubled project,” S&P wrote. “Unless a new plan is negotiated and funded, we will continue to downgrade the project as the long-stop date approaches” on October 31.

“The downgrade reflects growing uncertainty and a more limited margin of safety for the project,” Fitch wrote. “It is unclear where additional sources of funding will come from, without a contribution from Grupo Isolux Corsan, SA, the parent company of Isolux Corsan LLC … barring movement towards a new MOU with funding sources firmly in place, a downgrade to 'CCC' is likely in the next 60-90 days.”

The IFA and I-69 developers have struck an interim financing agreement to keep work on the project, now more than 50% completed, going with the goal of coming up with alternative restructuring plan over the next 60 days.

Failure to reach a new settlement or MOU that extends the longstop completion date beyond the current October deadline would trigger a termination event.

The Indiana Department of Transportation, Indiana Finance Authority and developer are “in discussions regarding the design builder (Isolux Corsan) and, under a confidentiality agreement, exploring options in moving forward with the completion of I-69 Section 5,” said a statement from Dan Huge, Indiana’s state public finance director.

In light of Isolux's situation, I-69 Development Partners has agreed to fund $4 million to cover construction cost through June and the IFA is making a $27 million milestone payment for work already completed to date.

“These combined actions will ensure work continues on the road while viable options are explored and a new solution is determined over the next 60 days,” Huge said.

I-69 Partners posted a notice on the latest development and investor call Friday on the Municipal Securities Rulemaking Board’s EMMA website.

The project’s latest woes emerged in early April when the builder’s parent Grupo Isolux Corsán S.A filed a notice allowed under Spanish insolvency laws that gives it up to four additional months to negotiate a restructuring or seek new funding to avoid insolvency.

The company failed in late March to obtain additional bank funding. Isolux was originally I-69 DP’s equity sponsor but in a restructuring last year it was among a portfolio of road projects transferred to PSP, a Canadian pension investment manager. PSP originally held a stake in the project through a partnership with Isolux. The two separated in 2015 but PSP returned to the project in Isolux’ restructuring.

Isolux’ near insolvency prompted the I-69 Partners and IFA to open discussions regarding possible alternative solutions to the completion of the project given their doubts that Isolux could still meet its financial obligations spelled out in the MOU, according to notices.

The interim solution that provides $31 million to keep work going was needed because $36 million in unspent bond proceeds could not be freed up to cover costs without a certificate from the designated technical advisor that available funds are sufficient to complete the project. It’s a condition of the collateral agency agreement between the developer and trustee U.S. Bank NA.

“In the event an alternative plan has not been finalized by the time these funds are fully expended” the IFA and I-69 Partners will ask for approval from holders of a majority in principal amount of the bonds to approve an amendment of the collateral agency agreement that would allow remaining bond proceeds be disbursed without a Technical Advisor Certificate,” the EMMA notice says. “In addition, IFA and Developer are exploring alternative plans to the global resolution described in the MOU.”

The IFA and developer say they need 60 days to investigate and develop an alternative plan to be presented to bondholders. Consent from holders with a majority of principal will be needed.

The IFA and I-69 DP are working on the form of a 60-day forbearance agreement that will be presented to the trustee and collateral agent for execution “upon the direction or consent of the holders of a majority in principal amount of the bonds,” reads the notice.

Further information is limited because various parties have signed a nondisclosure agreement with respect to certain information provided or to be provided by IFA and/or developer and anticipated confidential discussions about the form of the alternative plan.

The MOU reached in January was viewed positively by rating agencies and touted by Gov. Eric Holcomb. Payment issues had prompted I-69 Development Partners to issue six notices of default to the contractor in August, citing failure to promptly pay subcontractors and failure to present a remedial plan. They followed what was already an eight-month delay from utility coordination and permitting delays that led some subcontractors to demobilize from the site.

Delays left a limited margin remaining to complete the project by the then- contractual default deadline of October 31, 2017. Under the MOU arrangement the longstop default date under the concession agreement was revised to Nov. 30, 2018.

The IFA issued the project bonds, lending the proceeds to private contractor, I-69 DP, to finance the upgrades to a 21-mile stretch of highway between Bloomington and Martinsville that will become Interstate 69.

The bonds are secured by a first priority lien on I-69 DP net revenues. The IFA makes milestone payments during the construction period and then availability payments after the road opens.

The MOU arrangement required I-69 DP and Isolux to contribute $23.3 million and $52.0 million to the project, respectively.

Fitch Ratings initially rated the bonds BBB. It downgraded them to BBB-minus in April 2016 and junked them in August. S&P Global Ratings originally rated the bonds BBB-minus, sending them to junk BB-plus in April 2016..

Fitch lowered the rating on Friday to B-minus from B and left the rating on rating watch negative while S&P on April 14 knocked the bonds down to B-plus from BB-minus and put them on credit watch with developing.

Based on current reports from the project’s technical advisor completion is expected around May 2018 if additional funding is obtained and the long-stop date is extended from the current October deadline.

S&P said the rating could move either way depending on the outcome of negotiations.

“We believe that the sponsors and the Indiana Finance Authority remain incentivized to negotiate an alternative solution to complete the project,” analysts wrote. The IFA and equity sponsor PSP “likely have the ability to extend the schedule, replace the defaulting builder, and provide additional funds. In our view, it will be evident shortly whether they intend to do so.”

If the agreement is successfully restructured allowing for completion of the project within a revised schedule, the rating could go up. A possible multiple notch downgrade looms “if the project is unable to quickly advance an alternate plan to complete construction,” S&P added.

In the event of a payment default, S&P believes investors would see a 90% to 100% recovery due to the project’s value once completed and compensation arrangements under the concession agreement.

The PABs were structured mostly as terms due between 2025 and 2046 with $53 million due in 2034, $78 million due in 2040 and $77 million in 2046. Interest is paid in March and September. Holders with a majority of principal can accelerate repayment under an indenture default event.

The highway is a central thoroughfare for southwest Indiana, connecting Evansville to Indianapolis, and officials say it is important to the state's future economy.

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