WASHINGTON -
The TIFIA program - an acronym for the Transportation Infrastructure Finance and Innovation Act - provides credit assistance and loans, rather than more expensive grants, for up to 33% of the cost of surface transportation projects that cost at least $50 million.
The program, which offers direct loans, loan guarantees, and lines of credit, was among the financing novelties in the 1998 Transportation Equity Act of the 21st Century, also known as TEA-21 - the watershed transportation funding law that authorized spending $218 billion for transportation infrastructure between 1998 and 2003. The program was renewed in the recently enacted transportation law known as SAFETEA-LU, which stands for Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users. The law will provide $286.4 billion for road and transit construction and safety programs between 2004 and 2009.
TIFIA was designed, in part, to raise the credit profile of large transportation projects that would have had marginal credit quality at best without TIFIA assistance. The projects would in turn be able to achieve an investment-grade credit rating and obtain bond financing.
After a meek beginning, TIFIA is starting to live up to this purpose, according to Fitch analyst Cherian George, who authored the report.
"In our opinion the TIFIA program, which has been slow to develop, is showing positive signs," he said in an interview last week.
George explained that the program was initially used by projects that could have achieved investment grade credit ratings without the TIFIA assistance.
Initially, project sponsors "made a cost of capital decision to go to TIFIA, but that was not really what TIFIA was intended for," George said.
Among those early projects was a proposal to build the $1.3 billion Miami Intermodal Center, which would include improvements to surrounding roads, the addition of a 20-acre car-rental facility, and an automated airport people mover. A portion of the project, which is now under construction, is being funding with a $269 million TIFIA loan that will be repaid with state fuel tax revenues, according to the DOT.
"Since tax supported debt is generally rated high, this portion of the project's debt would likely have achieved an investment grade rating without TIFIA," George said.
A second TIFIA loan for $164 million will be used to finance the car rental facility, which will be repaid by car rental fees.
But since about 2002 the program has helped finance five user-based, stand-alone, self-supporting projects that would have had marginal credit quality without the TIFIA aid, "which is really what TIFIA was intended to do," he said.
One analyst agreed with the report.
TIFIA has in recent years aided more "projects that clearly are in need of assistance to de-leverage the senior lien to help it reach investment grade threshold," said Standard & Poor's analyst Kurt Forsgren, "That hasn't always been the case."
But Maria Matesanz, an analyst with Moody's Investors Service, believes it is "unclear" whether the pace of the program has picked up in recent years.
Fitch's George highlighted the Central Texas Turnpike project, a system of four interconnected toll roads in the greater Austin area estimated to cost about $3.7 billion. The first phase of the project is expected to cost about $3 billion and funding for phase one will come from a $916 million TIFIA loan, and $2.2 billion in debt issued by the Texas Turnpike Authority in 2002.
"Given the high level of risk in traffic and revenue forecasting the project's capital markets debt would not have likely achieved investment grade rating without TIFIA," George said.
George also attributed the program's slow ramp up to the fact that the projects that the program targets - large complicated projects that cannot be easily financed through the capital markets without federal credit enhancement - can take a while to get ready for financing due to a multiyear development process. He also pointed out that the program's weak start was also due to the U.S. DOT, which administers the program, and has had changed its role from a giver of grant funding to being a patient lender.
"Some of the slow progress in the development of TIFIA, in part, is because these projects take a long time, and some of the initial expectations of TIFIA may have been somewhat unrealistic given that you are dealing with a [U.S. DOT] bureaucracy that is trying to find its niche as a lender. And they clearly have begun to do that and that is positive."
TIFIA CREDIT ISSUES
As capital market participants have gotten more accustomed to TIFIA, innovations have been made in TIFIA-related financing structures, including the use of short-term bond anticipation notes to help pay for construction costs and repaying the Bans with TIFIA.
Bans typically provide about 2% or 3% return to investors versus the roughly 5% charged by the U.S. Treasury on a TIFIA loan, according to George.
The structure was used on the Central Texas Turnpike project, which saved an estimated $70 million.
"Even with smaller project the savings could be meaningful," he said.
However, he warned that the Bans issued from a state department of transportation, which has an ongoing relationship with the federal transportation agency and is familiar with project management, would likely be rated higher than those of a local government or a private corporation using private activity bonds.
Under TIFIA, "you have to meet certain federal requirements; the project has to meet certain timing thresholds or deadlines that the U.S. DOT has established, so [TIFIA funds are] not a guarantee," George said. "So it's important to understand the nature of the performance of the project sponsor.
"We tend to believe that the state departments of transportation, who do millions and millions of dollars of business with the federal government ... are best suited to meet the requirements of TIFIA and as a result can ensure that there is a timely draw on the TIFIA loan to repay the Bans."
"Projects that are not sponsored by DOTs, but sponsored by local municipalities, or by other sponsors even private sponsors do not have that kind of leverage," he continued.
Another credit issue centers on TIFIA's so called springing lien, which is triggered in the event that a bond issuer defaults on debt service and the default leads to bankruptcy. Under these circumstances, any debt service associated with TIFIA assistance is elevated to the same status as senior debt.
The provision "has been a source of concern since the inception of the program given that it is subject to broad interpretation, particularly as to when it could be invoked," the report said. "Since the springing lien has yet to be invoked with any project, there is uncertainty as to whether it will be invoked prospectively or subsequent to a bankruptcy, insolvency or liquidation scenario."
In order to clear up the uncertainty, Fitch recommends that using "a project life coverage ratio (PLCR) calculation," which allows the evaluation "of the future cash flows relative to the debt obligations of the project," George said.
"For example, the [TIFIA] project documents could specify that the springing lien would be invoked if the project's TIFIA PLCR falls below 1.0 times, which would imply repayment of less than 100%," the report said. "That after all is the federal government's concern."
Such a provision would likely enhance the credit quality of a TIFIA project, George said.
IMPROVEMENTS IN SAFETEA-LU
Authorization for the program expired with TEA-21, but the program was renewed under the recently enacted transportation bill known as SAFETEA-LU, which increased funding for TIFIA to $122 million a year for five years from between $80 million and $130 million over five years under the TEA-21
The funding could support about $12 billion in TIFIA loans and other aid for up to roughly $36 billion in projects, according to the report.
The new law also included certain improvements to TIFIA that makes the program "less restrictive than it used to be before," George said.
For example, the law lowered the price tag that a project must cost to be eligible for the program to $50 million from $100 million.
Eligibility was also extended to private freight rail facilities providing public benefits and port improvements necessary for intermodal access and eliminated a limitation on the amount of credit assistance that could be provided in a single year.
The law also a removes provision in TEA-21 that a project could draw no more than 20% of the line of credit per year and would also allow TIFIA lines of credit to prevent projects from technically defaulting on debt. Prior to enactment of SAFETEA-LU, a line of credit would only be available after a project had dipped into its reserve fund to repay debt - which technically counts as a default. Under the new law, the line of credit could be tapped before a project has to use its reserves to pay debt service.
George believes that the provision will make the TIFIA line of credit more valuable, as most projects have sought direct loans.
He recommended that projects look into a line of credit if they do not exhaust the 33% limit on credit assistance with a loan or loan guarantee.
The project "could use the remaining portion as a line of credit," George said "It's a free form of liquidity ... if you don't tap it, it doesn't cost you anything, if you do tap it, it actually supports your credit.
"It's something that, with these changes, can make the line of credit more attractive," he said.
Another improvement in the law would permit the use of TIFIA to refinance a project if the refinancing would provide additional financial help with the completion, enhancement, or expansion of a project.
"That would be a huge positive for projects that need refinancing and need improvement at the same time," George said.
