CHICAGO – Indiana is moving to take control of its troubled Interstate 69 public private partnership project as $240 million of private activity bonds issued for the project slide toward default.

“In the interest of moving I-69 Section 5 to completion, the Indiana Finance Authority has engaged in negotiations with the developer's bondholders and has made an offer to buy out the bonds and transition the I-69 Section 5 project under the state's direct management,” IFA’s public finance director Dan Huge said in a statement earlier this month.

“The developer's bondholders have not accepted IFA's offer to date. At this time, the state is moving forward with the goal of assuming control of the project,” Huge said.

The state began pursuing a takeover following efforts to reach a settlement with the developer and other stakeholders faltered after Isolux Corsán SA -- parent of the project’s construction contractor Corsan-Corviam Construccion SA -- initiated bankruptcy-like proceedings overseas.

That canceled out a memorandum of understanding struck earlier this year aimed at resolving construction defaults and financing problems to get the project back on track and avert a bond default.

The state is not on the hook for the bonds, which IFA sold in 2014 on behalf of the developer I-69 Development Partners LLC. The financial burden should the state assume control of the project, which needs an additional $165 million in funding to complete, is not expected to pose a credit risk, Fitch Ratings said in a Monday report.

The prospects for a deal with bondholders are uncertain and a global deal with all stakeholders appears unlikely since efforts on that front have been abandoned.

The current status prompted a fresh round of downgrades from Fitch and S&P Global Ratings that have left the PABs, issued with low investment grade ratings, deep in junk and near default.

“The downgrade reflects limited available options to successfully complete the project, given the failure to reach a global solution between all stakeholders and the current inability of IFA and bondholders to reach a negotiated settlement offer to redeem the PABs,” Fitch said in its June 9 report lowering the rating to CC from B-minus. Analysts left the rating on Negative Watch.

The official, final construction deadline which is referred as the “longstop” date of Oct. 31, 2017 under the project’s terms “is not achievable and default appears probable unless a settlement between IFA and bondholders is reached and the project transitions to state control,” Fitch added.

During recent negotiations, the state also decided to revise the final completion date to August 2018.

Sign of construction contrator Isolux Corsan
The troubles of Spain-based contracting firm Isolux Corsán have spilled over to an Indiana highway project. Isolux Corsán

Available funds can support construction work only through June and remaining bond proceeds can’t be released without the consent of the project’s technical advisor, a decision to be based on whether current funding is sufficient to complete the project.

“Resolution of the watch depends on a global solution between all involved parties or an agreement between IFA and bondholders that transitions the project to state control,” Fitch said.

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

S&P on June 7 dropped its rating to CCC-minus from B-minus. It remains on CreditWatch with negative implications. “The rating action reflects our view that absent unanticipated significantly favorable changes in the developer's circumstances, a default appears to be inevitable within six months," said analyst Tony Bettinelli.

S&P left its recovery rating at “1” to reflect what it projects is a 90% to 100% recovery ratio in the event of default based on bondholder protections built into the transaction.

The latest developments were outlined in a June 2 voluntary disclosure filing on the Municipal Securities Rulemaking Board’s EMMA site that followed the expiration of a nondisclosure agreement between the IFA and bondholders.

As part of the negotiations, IFA provided a summary of the estimated costs to complete the project compiled should it move to exercise its step-in rights to address a potential developer default on the project. As of the filing date, a developer default had not been declared.

If a developer default was declared bondholders have step-in rights of between 30-60 legal days, Fitch said.

“After this period, if the public-private agreement is terminated due to a developer default other than insolvency, compensation to bondholders could be substantially less than outstanding par amount and potentially as low as 80% of debt balance. There is of course potential for bondholders to make further claims in litigation, but that would not prevent default with no assurance of full recovery.” Fitch said.

The IFA outlined in the notice its belief that under certain circumstances the partnership agreement permits it “to undertake certain actions that may produce a recovery to holders of the bonds a recovery of less than the principal amount.”

However, it prefers a negotiated settlement with bondholders that allows it to redeem the bonds. Under its settlement offer, the IFA would fund termination compensation with proceeds of a new IFA bond issue by September 1.

IFA's most recent offer was an amount equal to the sum of: the principal amount plus accrued interest to the redemption date, the release of the debt service reserves totaling $6.2 million, less all other unspent bond proceeds of about $30 million, subject to agreement on other terms.

“As of the expiration of the NDA, negotiations have not resulted in an agreement,” the notice read.

Failure to reach a negotiated settlement between bondholders and IFA or a global solution for project completion between all parties with identified funding sources, ongoing disputes, inadequate liquidity and further work suspensions could drive further downgrades, Fitch said.

The IFA notice reports remaining costs at $237 million. With $72 million in remaining bond proceeds and other funds on hand, the project needs $165 million in additional funding, putting the project $162 million over its original projections.

P3 market participants have been closely following the project’s woes. It’s considered an outlier in the overall market but it does have broader implications for the sector and offers points that warrant more attention for future deals.

On its face, the PAB/availability structure mirrored others but the project is a reminder that “these are not riskless” projects as construction problems develop, Kurt Forsgren, a managing director at S&P, said during a transportation infrastructure panel discussion at The Bond Buyer’s Midwest Conference last week in Chicago.

The project’s troubles highlight the attention needed on the chosen partner, examining the reasoning behind cost differentials in individual bids, and financial stress testing of the project, Forsgren said.

S&P and Fitch previously lowered the ratings this spring over concern 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 would miss its final construction deadline of Oct. 31, 2017, or run out of liquidity beforehand.

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 triple-B range.

“Recent issues regarding a public private partnership project to rebuild a portion of I-69 are unlikely to affect the state of Indiana's credit profile,” Fitch said Monday.

Fitch said should the state assume control, no rating impact is expected because the state’s AAA issuer credit rating “already incorporates the par amount of the outstanding PABs, and the estimated exposure for completion risk is well within the state's capacity to absorb at the current rating.”

Whether the additional $165 million needed for the project is met through the state's cash on hand, additional financing, or a mix, is expected to “be immaterial to Indiana's credit profile.” The state has at least $1.5 billion in available cash balances.

The rating agency also suggests that the project’s woes could cool the state’s penchant for P3s, but it now has other options due to “recently implemented legislation to increase various transportation taxes and fees, and to explore tolling of interstate highways, providing additional financing and funding methods for infrastructure needs.”

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