Tollway Exits Chapter 11
SAN FRANCISCO — At its inception the South Bay Expressway toll road was promoted as a model public-private partnership. It took ages to build, then quickly plunged into bankruptcy.
The 10-mile tollway in southern San Diego County exited from bankruptcy last week, leaving its ownership in the hands of senior creditors, one being the federal government, which took a 42% haircut.
South Bay Expressway LP filed for Chapter 11 bankruptcy in March of last year in the Southern District of California, citing construction delays and costs, litigation with its contractors, and economic fallout from the housing and credit markets that cut into traffic.
The expressway cost $635 million to build, according to the Federal Highway Administration.
The South Bay Expressway was billed as a way of using government funds to attract private investment in an effort to off-load some of the risk. It was one of two P3 projects built under legislation California approved in 1989, when George Deukmejian was governor.
Former Gov. Arnold Schwarzenegger renewed the push for P3s after taking office in 2003. The project farthest along is a reconstruction of he Presidio Parkway Project in San Francisco.
The company that operates the South Bay Expressway saw its bankruptcy exit plan confirmed in federal court after getting support from secured creditors on April 29.
“It feels good to have emerged now,” said South Bay Expressway chief executive officer Greg Hulsizer. “The court was very good to us during the year that we were working our way through Chapter 11, in that we were able to continue our regular operations.”
The main settlement provides a group of 10 banks, including Spanish Bank Bilbao Vizcaya Argentaria and Irish bank Depfa, that held $363 million of the expressway’s debt prior to bankruptcy, with $210 millionofn new senior loans and a 68% stake in the toll road.
The road’s initial financing structure also included one of the first loans from the U.S. Department of Transportation under the Transportation Infrastructure Finance and Innovation Act of 1998.
The DOT, the second largest creditor with $172 million in TIFIA loans including interest, will get $93 million in new senior debt and $6 million in equity, according to a fact sheet posted on the FHA website. Itwill own 32% of the company, and share any surpluses with the other new owners, as well as any equity distributions.
The expressway borrowed $140 million through TIFIA in 2003, a figure that grew to $32 million because of capitalized interest. Interest payments on the 4.46% TIFIA loan had been scheduled to start in 2012 and principal payments in 2021.
“The department’s primary goals in arriving at an agreement were to ensure the good stewardship of taxpayer dollars by maximizing the potential recovery of the TIFIA loan and to maintain the road open for the traveling public,” DOT spokeswoman Nancy Singer said in an e-mail. “TIFIA continues to fill a vital role in advancing critical surface transportation projects.”
Demand for TIFIA loans has risen over the last couple of years amid falling Treasury rates and more expensive private-sector financing.
The toll road received 62 claims totaling more than $1 billion during the bankruptcy, many of which it claimed were invalid, according to court filings.
The South Bay Expressway was also able to settle several lawsuits before the confirmation hearings, including litigation with its primary contractors.
It also settled litigation with the California Department of Transportation and the San Diego Association of Governments. Caltrans had leased the right-of-way to the expressway when it was completed in 2007 and helped with upkeep of the toll road.
Caltrans gave the company a 35-year franchise agreement to recover investment by setting toll rates.
“The state of California is gratified that this matter was resolved amicably,” Caltrans director Cindy McKim said in an e-mailed statement. “This project resulted in a key 11-mile freeway connector being built, a project that was only completed because private funding was available.”
The next step for South Bay Expressway appears to be a sale.
The toll road has been in talks with the San Diego Association of Governments about a sale after the agency that represents 18 cities and governments in the region expressed interest in the deal, according to Hulsizer.
Hulsizer said other private entities have also expressed interest but added that he could not elaborate.
California awarded the franchise for the toll road in January 1991. But construction of the road, which extended State Route 125 to the Mexican border at Otay Mesa, was stalled for years as builders sought environmental permits.
The permits came in 2003, shortly after Australia’s Macquarie Infrastructure Group acquired a controlling interest in the concessionaire in 2002.
Macquarie wrote its investment in 50% of the expressway’s equity in the toll road down to zero in June 2009. The equity investors were wiped out in the bankruptcy.
The project included a $20 million environmental program that involved the purchase of 1,000 acres of land to be used as an open-space preserve.
One of the most significant features of the expressway is the Otay River Bridge, one of only two precast segmental bridges in the state, stretching three quarters of a mile and towering 18 stories high.
The highway did not open until November 2007 — just in time for the subprime mortgage market to unravel, taking a major toll on the suburban communities the expressway was built to serve.
Things are starting took look up, according to Hulsizer, in the form of year-over-year growth and a strong customer base.
“Now that our capital base is restructured, we are looking pretty solid going forward,” he said.
However, Hulsizer said the region must see a significant drop in its unemployment rate and a big rise in new housing and development before the toll road experiences strong growth.
The South Bay Expressway recorded $21 million in revenues by the end of fiscal 2009, resulting in $3 million in earnings before interest, taxes, depreciation and amortization.
By the time it went bankrupt, the tollroad had $640 million in assets and $570 million in liabilities, according to court documents.