DALLAS-- Indiana’s planned termination of a public private partnership and takeover of the Interstate 69 construction project illustrates the financial risks of such projects, Moody’s Investors Service said.
“Governments enter into P3s to efficiently develop and finance infrastructure, but depending on how they are structured, the P3 contract may obligate the government to make payments that are similar to debt,” wrote Moody’s in a commentary published Friday that noted Indiana can afford the takeover and that the move won’t impact its Aaa rating.
“The decision by Indiana to voluntarily terminate the contract highlights certain risks governments take on when they enter into availability payment P3s. It also underscores our treatment of availability payments as debt-like. Governments enter into P3s to efficiently develop and finance infrastructure, but depending on how they are structured, the P3 contract may obligate the government to make payments that are similar to debt,” Moody’s wrote.
Moody’s is the third rating agency to say the state’s top ratings are in the clear after the I-69 P3 unraveled. Indiana hopes to reach final agreements later this summer that would allow it to terminate the contract with private developer I-69 Development Partners and take out $240 million of bonds backed by the developer, replacing them with appropriation backed debt.
Indiana will assume direct control over the Indiana highway public-private partnership under settlement agreements “in principle” struck earlier this month with the developer and holders of 96% of principal of the private activity bonds.
The takeout financing will mostly be paid with state appropriation bonds, with the remainder coming from developer payments, unused bond proceeds and a debt service reserve. Moody’s said in the report that the state may also have to issue an additional $155 million of bonds to cover the costs to complete the project. Although the agreement fully repays the private lenders, it places the debt burden entirely on the state, said Moody’s.
For Indiana, the debt payments are manageable in the context of the state’s “strong credit profile” and are not expected to significantly increase the state's debt burden. Moody’s said it had treated the contract as a state debt obligation and included the net present value of the project in the state’s debt statement.
S&P Global Ratings and Fitch Ratings have also stated that the state’s arrangement regarding the troubled P3 project isn’t likely to damage the state’s ratings.
Indiana entered into the project in 2014 to complete a 21-mile highway connecting southwest and central Indiana. Construction delays and developer financial woes, including a bankruptcy filing, led the state to decide to take over the project in order to avoid a work stoppage that could have lasted through October.