CHICAGO -- Indiana will assume direct control over its Interstate 69 public-private partnership under settlement agreements “in principle” struck with the developer and holders of $240 million of private activity bonds.
The project’s construction delays, cost disputes, and the financial woes of the design-builder have dragged the PABs’ ratings deep into junk and put the bonds on a course toward default.
The Indiana Finance Authority board, which issued the bonds to support the project on behalf of the I-69 Development Partners, still must approve the preliminary settlement agreements. The developer, not the state is on the hook to repay the PABs.
They call for new state highway bonds to be issued to redeem the PABs, the P3 to be terminated, and the Indiana Department of Transportation to take over direct management of the project.
"I am delighted for Indiana taxpayers that we have reached an agreement for the state to assume control and finish this project," Gov. Eric Holcomb said in a statement Friday.
Under the agreements, the IFA will issue highway revenue bonds which are expected to be rated AA-plus based on current state ratings. Proceeds will redeem the PABs at a total cost with interest of $246 million.
Bondholders will receive an additional $12 million from the I-69 Development Partners and the IFA will receive $50 million from the developer.
The agreements release 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.
The agreements were reached with holders of approximately 96% in principal “to settle and resolve all disputes with respect to the I- 69 Section 5 Project,” according to a notice posted Friday on the Municipal Securities Rulemaking Board's EMMA website.
The bonds will be redeemed through an “extraordinary mandatory redemption at redemption prices that will cumulatively equal the principal amount thereof, plus accrued interest to the redemption date, plus $12,212,250,” the notice read.
A final settlement agreement and the issuance of the replacement bonds is expected by July 31.
The state’s public finance director Dan Huge said no increase in the project’s cost for taxpayers is expected and it there may be future state savings. The original cost in “today's dollars is approximately $590 million under the public-private structure; the new agreements and structure total approximately $560 million dollars,” a statement read.
Bondholders had previously rejected a state offer, though negotiations continued. The state began pursuing a takeover when 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 isn't on the hook for the bonds, which IFA sold in 2014. 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 recent report.
The looming default had prompted a fresh round of downgrades from Fitch and S&P Global Ratings earlier this month that 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.
Available funds could support construction work only through June absent a new deal. “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. 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 IFA outlined in a prior EMMA 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 continued negotiations in an attempt to reach a settlement.
The previous offer provided bondholders with principal 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.
The settlement appears to have sweetened the offer by raising the $6 million to $12 million from the developer. The new notice does not address the fate of $6.2 million in reserves.
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.
Fitch said in a recent report that 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.”