CHICAGO – S&P Global Ratings dropped $244 million of private activity bonds issued for Indiana’s Interstate 69 public-private partnership project further into junk and left the rating on watch as state negotiations with its private partners continue over how to resolve financing woes.

S&P lowered the rating on the bonds issued on behalf of I-69 Development Partners LLC by the Indiana Finance Authority in 2014 to B-minus from B-plus. That leaves the rating at the same level Fitch Ratings assigns following a downgrade last month. S&P also downgraded the bonds in April.

I-69 indiana P3 road project
Work continues on Indiana's troubled public private partnership to build a segment of Interstate 69.

The rating action reflects S&P’s view that without the intervention of the IFA and Public Sector Pension Investment Board, a Canadian pension fund that is now the primary sponsor of I-69 partners, the project is poised to miss its final construction deadline of Oct. 31, 2017, or run out of liquidity beforehand.

The IFA is not on the hook for bond repayment.

Various payments to the developer under the P3 agreement go to repay the debt.

“We view it as therefore vulnerable to a default and reliant on the sponsors and the concession grantor, the IFA, to come to a mutually agreeable solution," S&P Global Ratings analyst Tony Bettinelli wrote in the Friday report.

The IFA and its private partners had reached a memorandum of understanding earlier this year that resolved various construction and financial issues but it recently collapsed as the parent company of the lead contractor – Isolux Corsan LLC -- works to avoid insolvency.

The IFA, state transportation department, 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.

S&P said if a revised memorandum of understanding is reached, a multiple notch upgrade could occur depending on the security package and changes in the final construction date. The MOU struck in January pushed off a project completion deadline to November 2018.

The state 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,” Dan Huge, Indiana’s state public finance director, said in late April. The IFA said Friday that construction work and negotiations continue.

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

An 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, according to a notice on the Municipal Securities Rulemaking Board's EMMA disclosure website.

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 bonds were initially rated in the low-investment-grade triple-B range. 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.

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