Skanska continues exit from U.S. P3 sector with Virginia asset sale
Skanska continued its exit from the U.S. P3 sector by divesting the company of Virginia's Elizabeth River Crossings tunnel project.
The Sweden-based company announced Monday that it signed a binding sale agreement to shed its 50% ownership stake in Elizabeth River Crossings HoldCo LLC, the concessionaire that has a public-private partnership with the Virginia Department of Transportation.
In 2018, Skanska said it would stop bidding on mega-P3 projects in the United States because the risk and reward tradeoffs for such ventures had become unattractive here.
Also on Monday, the other private partner in the project, Macquarie Infrastructure Partners II, announced that it will divest its 50% managed equity share in ERC HoldCo LLC. The company, however, is not exiting the P3 sector.
The 50-year concession agreement is being sold to Spain-based global toll road operator Abertis Infraestructuras S.A. and Toronto-based Manulife Investment Management, on behalf of John Hancock Life Insurance Co. The transaction is expected to close by the end of this year.
The enterprise value of the ERC concession is about $2.4 billion, which consists of $1.127 billion of net debt and $1.25 billion in equity.
Abertis did not respond to a request for comment about the acquisition.
José Aljaro, chief executive officer of Abertis, said in a statement that purchase of the ERC concession furthers the company’s growth strategy in the U.S.
“This acquisition is a further step in the ambitious growth strategy of the Abertis Group, with the acquisition of a solid platform in the United States, a country that offers a strong commitment to public-private partnerships and to the concession framework,” Aljaro said. “We are also very happy to initiate a new partnership with John Hancock. The deal has been possible thanks to the active support of our shareholders, Atlantia, ACS and Hochtief.”
VDOT Commissioner Stephen Brich said the state looks forward to partnering with the new concession owners after all approvals are obtained.
“ERC has advised us that, as reported, Abertis Infraestructuras, in consortium with the U.S.-based investment firm John Hancock, has today reached agreement for the acquisition of 100% of the share capital of Elizabeth River Crossings," Brich said in a statement Monday.
"The sale agreement is subject to regulatory and other closing conditions, including a consent review by the Virginia Department of Transportation as required by the comprehensive agreement," he added.
VDOT reached financial close on the $2.1 billion toll concession in April 2012 to build a new tunnel under the Elizabeth River between Norfolk and Portsmouth, parallel to the existing Midtown Tunnel. The existing tunnel and two other downtown tunnels were rehabilitated.
The project was completed in September 2017.
The Virginia Small Business Financing Authority issued $663.75 million of senior-lien revenue bonds for the project in 2012. Final maturity is in 2042.
The project's financing also included a $422 million subordinate low interest loan through the federal Transportation Infrastructure Finance and Innovation Act. The bond and TIFIA loan proceeds were lent to Elizabeth River Crossings Opco LLC, an entity created to finance the ERC project.
Fitch Ratings affirmed its BBB ratings on the bonds and loan in September.
It maintained the negative outlook it assigned in April, which reflects significant revenue forecasting uncertainty introduced by the coronavirus pandemic, and the ERC’s dependence on traffic and revenue growth to sustain a back-loaded debt structure.
S&P Global Ratings downgraded to BBB-minus from BBB the ERC’s bonds and loan ratings in April to reflect a significant decline in traffic because of measures to slow the spread of the pandemic and a reduction in the mandatory debt service coverage ratio of 1.12 times in 2020 compared with 1.5 times that had been expected. The outlook is negative.
In October 2018, Skanska President Anders Danielsson said during a preliminary third-quarter earnings report that losses on two major U.S. projects led the company to reevaluate its participation in public-private partnerships.
“The risk-reward is not attractive for us,” he said in a conference call with analysts.
Danielsson said the company would stop bidding on new mega P3s after taking $100 million in write-downs on two projects he described as about 50% complete. He also described the two troubled P3s as “large and complex,” but he would not identify the projects “out of respect” for the company’s clients.
"Once closed, it would be the first P3 divestment for Skanska in the U.S.," company spokesman Michale Iacovella said about the ERC concession.
The firm is still involved in a number of ongoing P3s in the U.S., including its largest: a $4 billion overhaul of New York City's LaGuardia Airport. In June, the new LaGuardia Airport Terminal B arrivals and departures hall opened as work continues on other projects at the airport.
In Florida, Skanska continues working on the complex 21-mile, $2.3 billion redevelopment of Interstate 4 through densely populated Orlando. It has experienced delays and unanticipated costs. The project was financed in 2014 with a $949 million Transportation Infrastructure Finance and Innovation Act loan, and $486 million in bank loans and equity.
I-4 Mobility Partners Opco LLC is a venture between Skanska Infrastructure Development Inc. and John Laing Investments Ltd., formed to do the I-4 project.
In a periodic review of I-4 Mobility Partners' Baa1 rating Oct. 29, Moody's Investors Service said the rating reflects a supplemental agreement negotiated between the concessionaire and the Florida Department of Transportation in April that adds a new milestone date for completing general use lanes by the end of this year, along with changes to the structure of milestone and availability payments.
"The rating also reflects the construction progress to date, with approximately 20% remaining, in addition to a financially sound and experienced [design-build joint venture] team with experience on similar projects in central Florida," said Moody's analyst Jennifer Chang.
The I-4 project also includes the addition of tolled express lanes, which will open a year behind schedule by the end of 2021.
While Skanska is exiting the P3 business, Macquarie is not.
Monday's announcement is part of a full sale of the ERC project to Abertis and Manulife, Macquarie said in a release.
“We are proud to have partnered with VDOT and ERC management and staff over the last eight years to deliver improved transportation infrastructure to the Hampton Roads region," Karl Kuchel, chief executive officer of Macquarie Infrastructure Partners, said in a statement.
"Public-private partnerships are an important part of closing the infrastructure gap in the United States and ERC is a clear example of this, with major infrastructure improvements being implemented on schedule and on budget," Kuchel added.
Meanwhile in Florida's panhandle, Skanska is potentially facing new liabilities in connection with Hurricane Sally, when 27 of its construction barges broke free from moorings, some severely damaging the Pensacola Bay Bridge and rendering it impassable on Sept. 16.
The barges were being used by Skanska to widen the bridge under a $430 million contract with FDOT. The bridge runs between the cities of Pensacola and Gulf Breeze.
The Pensacola-based law firm Aylstock, Witkin, Kreis & Overholtz said it filed five lawsuits against Skanska on behalf of local businesses in Gulf Breeze, Pensacola Beach, and Pensacola in the First Judicial Circuit Court in Escambia County on Nov. 5.
"The lawsuits allege that Skanska failed to adequately secure or relocate its work platforms as Hurricane Sally approached the Gulf Coast, resulting in the devastation of the Pensacola Bay Bridge," the firm said in a release. "The destruction of this critical vein of commerce...has resulted in crippling, if not insurmountable, economic losses for local businesses."
The Aylstock firm said it represents "hundreds of individuals and businesses" in surrounding communities seeking to file claims against Skanska.
The Escambia County Commission is also seeking a settlement with the company to recoup increased expenses caused by having to drive longer alternate routes, like providing emergency medical services, and for repairs to a barge-damaged fishing pier.
The Florida Department of Transportation has said the Pensacola Bay Bridge has a targeted re-opening date of early March 2021, and that recent work includes demolition efforts and underwater inspections.
One barge remained under the bridge as of Nov. 5, and 22 barges have been removed from the area.
Since the hurricane threatened, tolls on the nearby Garcon Point Bridge have been suspended because it's being used as a detour. The tolls secure debt payments for bonds issued to build the bridge by the Santa Rosa Bay Bridge Authority.
The bonds have been in default since 2011 because the span never met traffic and revenue projections. The debt was accelerated in 2013.
UMB Bank, trustee for the bonds, has said in court filings that toll collections should have resumed when the hurricane emergency ended Sept. 16, and that there is concern FDOT will continue to suspend tolls while bridge repairs are being done.
On Nov. 3, Circuit Judge John Cooper ruled that UMB could file a second amended complaint in an existing lawsuit to add a charge contending that FDOT exceeded its legal authority in suspending tolls so long after the emergency associated with Hurricane Sally had passed.
Cooper ordered FDOT to respond to the amended complaint on or before Dec. 4.
While FDOT hasn’t said how much it will cost to repair the Pensacola bridge, the agency has notified Skanska that the state will seek damages for the amount of toll revenue lost on the Garcon Point Bridge.