BRADENTON, Fla. - The consortium building the $2.3 billion Interstate 4 project in central Florida plans to forsake bond financing of the state's largest public-private partnership in favor of bank and federal loans.
The loans offer cheaper financing than the $2 billion in private activity bonds that had been approved for the project by the Federal Highway Administration, according to I-4 Mobility, the consortium chosen by the state to design, build, finance, operate, and maintain the 40-year concession.
The "I-4 Ultimate Project" covers 21 miles in Orange and Seminole counties, and involves reconstructing the interstate to add four tolled express lanes, and the rebuilding or new construction of 15 interchanges and 124 bridges.
Construction will take place while keeping a congested urban corridor open where much of the traffic is headed to Orlando and the region's mega-theme parks.
The Florida Department of Transportation in April selected I-4 Mobility, a concession led by Sweden-based Skanska Infrastructure Development Inc. and John Laing Investments Ltd. of London, as the winner of the 40-year contract.
I-4 Mobility will use $489 million of bank debt and nearly $1 billion in low-interest federal loans from the Transportation Infrastructure Finance and Innovation Act program to finance construction because it is less costly than using bonds, according to the financial proposal prepared by Skanska and Laing, and obtained by The Bond Buyer.
Skanska and Laing, which are well known in the P3 sector, say the loan negotiated with six banks offers "a significantly lower interest rate" of 4.04% compared to triple-B rated private activity bonds at 4.49%.
None of the banks are based in the United States.
"Our financial advisor, who is also a senior lender on this transaction, has indicated that the low credit spread on the senior bank facility for this project has not been seen in the U.S. market since prior to the financial crisis in 2008," said the financial proposal submitted to the FDOT.
The financial advisor for the consortium is Paris-based Societe Generale, which is a senior lender along with the Bank of Tokyo-Mitsubishi UFJ Ltd., Canadian Imperial Bank of Commerce, Frankfurt-based KfW IPEX Bank GmbH, Stockholm-based AB Svensk Exportkredit (publ), and France's Credit Agricole Bank, the proposal said.
It is not unusual for international banks to show interest in large U.S. transportation projects, according to Jim Tymon, chief operating officer and director of management and program finance for the American Association of State Highway and Transportation Officials.
"I think that the international banks have a lot more history and experience with entering into these kinds of agreements for infrastructure financing," he said. "It's still kind of fledgling market for most U.S.-based banks."
European, Australian, and Asian banks also have a level of familiarity with P3 projects that does not exist in the U.S. yet, said Tymon.
Tymon said that FDOT has used bank and TIFIA loan financing for previous P3 projects, including the I-595 Express Lanes in south Florida and the Port of Miami Tunnel project, though both projects were financed during the credit crisis when bond financing was scare.
While the financing environment is different today, structuring a P3 with bank financing could make sense to FDOT, which may "feel it has good experience doing this type of package," Tymon said.
I-4 Mobility's financial proposal was submitted several months ago to FDOT, which is expected to reach commercial and financial closing on the project in the next two weeks.
FDOT, Skanska, and Laing declined to comment about the financial proposal because closing is pending, and dependent on finalizing the loans.
The concession contract between FDOT and I-4 Mobility already has been signed, according to Standard & Poor's, which released a preliminary rating last week of BBB for the bank and TIFIA loans financing most of the construction phase.
Moody's Investors Service assigned a preliminary rating of Baa1 to the loans last week as well. Both ratings have stable outlooks.
FDOT required minimum ratings of Baa3 and BBB-minus, the lowest category for investment grade.
"The rating reflects our view of the project's contractual structure, which appropriately allocates risk between the project and FDOT, and our assessment of the project's risks in completing construction on time and within budget, and in operating the project over the long-term concession," said S&P analyst Dhaval Shah.
Shah said the key construction risk involves logistics due to the large scope of work and the need to manage traffic along heavily congested operating roads while construction is going on. The project is divided into four sections, with multiple phases starting construction at the same time.
"We also view the construction contractors as experienced with the level of traffic management required for this project," Shah said.
The contractors are Skanska, Granite Construction Co., and the Lane Construction Corp.
Moody's said its rating also considers the financial strength of the contractors, which have "significant combined experience on similar projects in central Florida."
"While the project is quite large in scale, with severe construction constraints in some areas, the required construction means and methods are relatively straightforward and widely used," said Moody's analyst Earl Heffintrayer.
The ratings cover the bank loan and $949 million TIFIA loan, which will be issued in two tranches as $130.7 million of short-term debt maturing in 2023 and $818.4 million in long-term debt maturing in 2052.
According to I-4 Mobility's proposal, bank financing provides "substantially fewer steps" and lower costs to reach financial close, as well as fewer parties involved in the process.
Bank loans do not require lengthy bond offering documents or the public hearings that would be required by the Tax Equity and Fiscal Responsibility Act for private activity bonds. They also eliminate the need for marketing the bonds, the finance plan said.
In addition to the loans, construction of the project will be financed with $105.6 million in equity from Skanska and Laing, which can be earned back if the project meets the terms and conditions imposed by FDOT, people familiar with the project said.
The FDOT will also pay the consortium a total of $1.723 billion during construction, according to S&P.
State funding for construction will come from local, state, and federal sources, and will be made to the contractor in 17 "periodic payments" totaling $1.035 billion over the construction period, in addition to two final acceptance payments of $300 million and $388 million.
The use of periodic payments is largely a new concept in the P3 industry, and replaces traditional payments based on meeting milestones during construction, according to experts knowledgeable about the I-4 project.
I-4 Mobility will receive periodic payments from FDOT based on a percentage of work completed over time because the contractors may work on various segments of I-4 intermittently, which would make it difficult to carve out distinct pieces on which to base payments based on milestones such as completion of a certain segment.
Construction loans as well as FDOT periodic and final acceptance payments will be made over the six-year construction period. During the remaining 34 years of the concession, I-4 Mobility will receive annual operating and maintenance availability payments totaling $80.7 million, which are subject to meeting state performance standards.
The state will collect toll revenues on the managed lanes with those funds going toward project availability payments.
While bonds will not be used by the concessionaire or FDOT on the project, capital market financing will support a $230 million contribution toward the I-4 project to be made by the Central Florida Expressway Authority or CFX, formerly known as the Orlando-Orange County Expressway Authority.
CFX currently plans to use bond proceeds to finance all or a portion of its contribution, which will go toward the reconstruction of its State Road 408 east-west expressway interchange with I-4 near downtown Orlando.
The DOT's team on the I-4 project consists of the engineering design firm Reynolds, Smith and Hills Inc., financial advisor KPMG Corporate Finance LLC, and the law firm Nossaman LLC. URS Corp. is performing traffic and revenue forecasting.
I-4 Mobility's attorneys are Ashurst LLP and Greenberg Traurig LLP. Counsel for the senior bank lenders is Latham & Watkins LLP.
