DALLAS -- The Indiana Finance Authority will price $180 million of highway revenue refunding bonds Wednesday to complete the financing piece of its takeover of a troubled public private partnership highway project.
The bonds will take out $210.7 million of bond anticipation notes issued by the IFA last week to redeem $246 million of private activity bonds as part of settlement agreements that terminate its contractual relationship with I-69 Development Partners LLC and put direct control of the I-69 Section 5 project under the Indiana Department of Transportation.
The state’s action terminating the P3 “is a practical step by the state toward resolving a construction project that has been hampered by issues since early days,” Fitch Ratings said in a special commentary Monday. It also serves as an example of how projects can be completed even when a private public partnership fails.
“Notwithstanding I-69's troubles, industry and Fitch experience related to construction on Public Private Partnership projects indicates that these structures contain considerable protections to ensure projects are completed well within schedule parameters established in concession agreements and projects are insulated from material cost escalations,” wrote Fitch. “[In] instances such as this one where poor execution by the project company and decisions by the grantor result in terminations of the concession agreement … the projects do get completed, as will be the case with the I-69 Section 5.”
The settlement agreements released the state from future liabilities or claims that could have been made by bondholders, the developer, the design-builder Isolux Corsan, and insurance and surety companies. The state assumes all future financial risk to operate, maintain, and preserve the new roadway over the next 35 years instead of its private partners.
“It is important to note that in the absence of these meaningful counterclaims, compensation to bondholders would have likely been substantially less than the outstanding par amount and potentially as low as 80% of the debt balance,” according to Fitch.
The IFA plans to price $180 million of long term highway revenue refunding bonds to refund the BANs Wednesday. Goldman Sachs is senior manager, Public Financial Management is the financial advisor and Ice Miller LLP is bond counsel.
The bonds are rated AA-plus by S&P Global Ratings and Fitch Ratings. Moody’s rates the bonds Aa1. IFA public finance director Dan Huge said the rating is considerably higher and more advantageous to the state than the BBB and BBB-minus ratings originally assigned to the developer’s private-activity bonds and will result in interest savings over time.
“Appropriation obligations are very important to state of Indiana,” said Huge during an investor presentation of the bonds. “The state has never failed to appropriate lease rental payments related to any lease appropriation debt.”
Historically rental payments have been made from the gas tax fund and crossroads 2000 funds. “These funds are funded by a formula from a portion of the state taxes imposed on gasoline distributors, vehicle license permits, registration and license plate fees,” said Huge.
Huge said that the state has a very manageable amount of appropriation supported debt. “Specifically after the issuance of the 2017A bonds, the state’s authorizing legislation does not permit the issuance of additional highway revenue bonds other than the completion bonds for I-69 project and refunding bonds,” Huge said.
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 project’s construction delays, cost disputes, and the financial woes of the design-builder tipped the PABs’ ratings deep into junk as the bonds headed toward default. S&P on June 7 dropped its rating to CCC-minus from B-minus. In May, S&P lowered the bonds to B-minus from B-plus. Fitch lowered the rating to B-plus in April. Fitch said in its June 9 report it was lowering the rating to CC from B-minus.
The original bonds were secured by a first priority lien on I-69 DP net revenues. The IFA was to make milestone payments during the construction period and then availability payments after the road opened. The IFA was not obligated to repay the original bonds.
Bondholders will receive an additional $12 million from the I-69 Development Partners and the IFA will receive $50 million from the developer.