TIFIA Loans Carry Pluses and Perils, Fitch Says

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DALLAS - TIFIA loans and similar federal programs will become more prevalent in the funding of public-private partnerships and other projects as conventional highway and transit grants dwindle, Fitch Ratings said in a report.

But the Transportation Infrastructure Finance and Innovation Act TIFIA program is a subordinate lender with teeth, Fitch cautioned.

Repayment of a TIFIA loan is subordinate to repayment of senior lenders in the waterfall when the transaction is performing, but things change if revenues are not sufficient, said Fitch associate director Jeffrey Lack, lead analyst on the TIFIA report, released Wednesday.

TIFIA agreements between the borrower and the Transportation Department stipulate that the loan's claims on a project's pledged revenues spring to parity with other creditors in bankruptcy-related events, he said.

"The springing lien nature of the pledge gives TIFIA considerably more influence in a distressed situation than a typical subordinate lender," Lack said.

The federal government has a history of protecting its interests more like a commercial lender than a public grant-providing agency in the rare springing events have occurred on TIFIA-funded projects, Lack said.

The springing lien provision is both positive and negative, Lack said. While it could partially dilute the credit strength of senior-lien bondholders, the provision ensures TIFIA will have a seat at the negotiating table and act in the project's best interest so that all lenders get paid.

"The springing lien can be a pro if it creates a discipline for better structured projects, where TIFIA is truly viewed as debt and not as a government obligation," he said.

TIFIA transactions are usually rated on a par with senior debt, at least during the construction period, given the springing lien potential, Lack said.

"This and other features present unique credit considerations when evaluating a financial structure that includes a TIFIA loan and have generally kept TIFIA ratings consistent with senior debt," he said.

Fitch rates TIFIA-backed projects on a case-by-case basis, Lack said, taking into account project fundamentals as well as specific provisions of individual agreements,

TIFIA loans are attractive to public-private partnerships as well as governments seeking to finance large transportation projects because the fixed-rate loans carry an interest rate equivalent to Treasury notes, Lack said, noting that the loans also feature flexibility in debt amortization.

The TIFIA rate on Oct. 29 was 3.06%, according to the Federal Highway Administration.

The low-interest loans will become even more popular as federal transportation programs move away from traditional grant funding to greater reliance on loans and credit enhancement programs, Lack said.

"By utilizing TIFIA, projects that would otherwise be non-investment grade have the potential to reach investment grade through more favorable transaction terms," he said.

Lack said the outlook for TIFIA's continuation is good as most, if not all, of the proposals for long-term transportation funding legislation would extend the program at its current level of $1 billion a year.

TIFIA was established by the Transportation Equity Act for the 21st Century in 1998 at $80 million a year. The program was renewed and expanded by successor measures in 2005 and 2012 that moved the total authorization to $750 million in fiscal 2013 and $1 billion in fiscal 2014.

The loans can cover up to 49% of a project's cost. The TIFIA loan portfolio includes 47 projects that have received a total of $19.3 billion in credit support.

Texas has received $3.4 billion in TIFIA loans for projects in Houston, Dallas, and Austin. The District of Columbia has received $2.6 billion, including a recent closing on a $1.3 billion loan for the Silver Line light rail project to Dulles International Airport.

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