When Louisiana officials began putting together a historic bond deal to help build a road from Port Fourchon to the mainland, one of their main goals was to provide an evacuation route in the event of a hurricane.
The $161 million transaction was the Southeast regional finalist in The Bond Buyer's Deal of the Year Awards for 2005. And its relevance has been made even clearer by Hurricane Katrina, which put the existing road underwater and paralyzed the port and its oil and gas operations.
While the efforts that went into structuring the deal were significant, they were somewhat overshadowed in recent months by financial problems the project has experienced, including the possible negative effect of Katrina. Citigroup Global Markets Inc. was the underwriter for the deal, with the rest of the underwriting team being made up of A.G. Edwards & Sons Inc., Dorsey & Co., and Siebert Brandford Shank & Co. Foley & Judell was bond counsel.
The debt was sold in May by the Louisiana Transportation Authority, which was created specifically to issue debt for the project.
Since 2002, officials with the state's Department of Transportation and Development have worked with Citigroup to craft a financing to fund the construction of a bridge that would replace the one and only existing road leading to the port. It is prone to flooding, and ended up under at least four feet of water for about two days after Katrina came ashore, paralyzing entry to and exiting from the port, according to Michael Bridges, undersecretary for management and finance for the DOTD.
"Once the water receded, truck and vehicle traffic resumed, but if the bridge was there, it would have been a faster recovery" Bridges said. "The need for a reliable route to Port Fourchon was made even clearer by Hurricane Katrina."
Port Fourchon services more than 75% of all exploration rigs and production platforms in the Gulf. At least 1,000 trucks are unloaded and loaded at the port per day, and there are several pipe yards, shipyards, platform construction facilities, service bases, and barge terminals near it that support the oil and gas industry. The port is essentially a part of an intermodal transfer where all of the materials and equipment are transferred from one mode of transportation to another.
So while local officials had a vested interest in making sure it is easily accessible, its importance is also national.
After exhausting several scenarios to improve access to the port, officials settled on replacing the existing road with an elevated two-lane highway.
To finance it, about $95 million of senior-lien toll revenue bonds and $66 million of subordinate-lien bond anticipation notes were sold. The senior-lien bonds included $78.4 million of Series 2005A bonds and $16.3 million of Series 2005B capital appreciation bonds. In addition, a $66 million loan was secured from the federal Transportation Infrastructure Financing and Innovation Act. Officials anticipate repaying the Bans in 2009 with a loan provided under the TIFIA program.
Officials tout the deal as being innovative for several reasons. First, the transaction provides a model for financing what was once considered an unfeasible "start-up" revenue-driven project.
For example, the total cost of the project is $200 million. When officials realized the revenues from the toll road would only be sufficient to support a roughly $150 million bond issue, they sought out a TIFIA loan from the U.S. Department of Transportation to provide subordinated debt. Officials also were able to work out an arrangement with the Louisiana Transportation Authority so that it took on a significant portion of the project and construction risk instead of that risk being shared with the senior bondholders.
To add additional security for the deal, Louisiana agreed to replenish the debt service reserve fund, and surety, for any draw, through an appropriation. The state DOTD also agreed to guarantee construction overruns.
Because this is a toll road transaction, officials had to address concerns over the revenue forecasts they were using. They were further challenged because more than 80% of the revenues from the road would depend on the trucks servicing the port, and only 8,500 vehicles had been forecast to use the road daily.
Officials also had to address the issue of whether the oil supply in the Gulf could be depleted before the bonds mature. However, it was determined that it could take another 44 years to deplete the resources available.
While structuring the deal, officials were able to achieve several firsts. For example, it will be the first toll road in Louisiana to use a turbo structure so that it could earn investment grade ratings. It is also the first toll road in the state allowing an anytime call to enable the turbo repayments.
When the deal closed in the spring, officials were planning to open the road in 2008, but in June they suffered a setback. Bids for construction of the road came in almost $100 million above estimates.
DOTD officials blamed the significantly higher bids on the project's short schedule and overtime wages and the fact that several other large construction projects in the region are competing for materials and labor.
Faced with not being able to issue additional debt to fund the project, officials decided to lengthen its time frame. Bridges said that construction has been broken into three parts, and that the original completion date has been pushed back by 16 months. The targeted opening date is now December 2009.
Based on this new formula, officials have begun the process of accepting new bids.
"We feel like if we give contractors additional time, it will reduce the cost of the project," Bridges said. "By the end of February, we will have in hand bids for the entire project, and then we will proceed with awarding the contract."
He added that the hope is that more bids will come in this time around. Only two came in June.
Early this month, Moody's Investors Service and Fitch Ratings downgraded senior-lien debt issued for the project.
Scott Trommer, an analyst with Fitch, noted that project costs could still be higher than original estimates, which would place additional financial pressure on the authority, the DOTD, and the state to find funding solutions.
Fitch originally assigned ratings of A-minus to the $95 million of senior-lien debt and A-plus to the $66 million of subordinate-lien Bans. Standard & Poor's rated the senior debt A and the subordinate debt AA, and Moody's rated the senior debt A2 and the subordinate Aa3.
After downgrading Louisiana because of the fiscal strain the hurricanes have taken on the state's budget, Fitch lowered the senior toll road debt to BBB-plus. Moody's lowered the same debt to A3. Standard & Poor's has taken no action concerning either series.
Officials say bondholders should take comfort in the fact that there is capitalized interest on the debt through 2009.
Bridges said all indication is that the state will fulfill its obligation for the project if it ran into problems. But he also said that it's well positioned because, in at least one way, hurricanes Katrina and Rita could actually turn out to have a peculiar upside for the project.
That's because the storms wiped out competing ports in the vicinity, which means Port Fourchon will be used even more.
"We expect there will be an increase in traffic, which means traffic on the road will increase," Bridges said.
