Indiana’s AAA issuer credit rating won’t suffer as a result of its preliminary agreement to take over the collapsing Interstate 69 private partnership project using state bonds to take out $240 million of bonds backed by the developer, a second rating agency has said.
Last week, the state announced it would assume direct control over the Indiana highway public-private partnership under settlement agreements “in principle” struck with the developer, I-69 Development Partners and holders of 96% of principal of the $240 million of private activity bonds. The Indiana Finance Authority, which sold the bonds on the developer’s behalf, will issue the new debt.
The rating agency had treated the $240 million of private activity bonds as a state debt obligation and included the net present value of the project in the state’s debt statement and amortization although the state was not on the hook for repayment under the deal terms. As a result, “the recent developments will not have a meaningful effect on our view of the state's debt and contingent liability profile,” S&P said in a bulletin Wednesday.
“While the state is expected to complete the project at an estimated cost of $150 million-$160 million, we understand the ultimate method of finance has yet to be determined,” S&P added.
S&P is the second rating agency to weigh in on the subject of whether a state takeover would damage the state’s ratings.
On June 12, Fitch Ratings said that the troubled P3 project did not pose a risk to the state’s issuer default rating of AAA.
“Fitch's IDR for Indiana 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,” Fitch wrote in the report that was released prior to the state’s announcement of a settlement in principle.
The agreements 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.
The Indiana Finance Authority board 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 state has also revised the final construction deadline which is referred as the “longstop” date to August 2018 from Oct.31.
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.
A final settlement agreement and the issuance of the replacement bonds are expected by July 31.
The project’s construction delays, cost disputes, and the financial woes of the design-builder tipped the PABs’ ratings deep into junk as the bonds headed toward default. S&P on June 7 dropped its rating to CCC-minus from B-minus. In May, S&P lowered the bonds to B-minus from B-plus. Fitch lowered the rating to B-plus in April. Fitch said in its June 9 report it was lowering the rating to CC from B-minus.
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 was to make milestone payments during the construction period and then availability payments after the road opened.
