CHICAGO -IFM Investors' $5.72 billion bid for the Indiana Toll Road lease is among the largest bids for a U.S. public asset to date, boding well for the P3 sector and signaling rising interest by pension funds in infrastructure investment, market participants said.
The Australian fund manager agreed to acquire the toll road lease from its bankrupt concessionaire, Indiana Toll Road Concession Company LLC.
ITRCC filed for Chapter 11 bankruptcy in September. A special committee headed by UBS ran a competitive bidding process for the sale of the company and the lease, which has 66 years remaining.
IFM's bid beat three others though the details of the other bids have not been released. A pair of northwest Indiana counties with a plan to float tax-exempt bonds to finance their own bid said Wednesday that they are still hoping to be considered despite IFM's apparent winning bid.
IFM's bid is the largest for an existing public asset in the U.S., according to several market participants. It shows the strong interest for public assets like existing toll roads, which come on the market relatively rarely.
The bid also marks the first time that major U.S. pension funds have invested in American infrastructure, according to IFM, which said the deal shows rising interest among pension funds globally in investing in infrastructure.
The company is owned by 30 non-profit Australian pension funds.
"This is a significant investment for U.S. pension funds as we're seeing pension funds around the world becoming more interested in infrastructure," said Julio Garcia, head of infrastructure for North America for IFM Investors.
"This is one of the first examples of major U.S. pension funds investing in American infrastructure," he said. "Most of our investors that will be the beneficiaries are large U.S. pension funds."
They include California state Teachers’ Retirement System, the New York City Employees' Retirement System, the State Board of Administration of Florida, the Arizona State Retirement System, and the Illinois State Board of Investment, according to IFM.
Its bid still needs to clear at least three regulatory hurdles, including assent from the Indiana Finance Authority. If approved, the firm hopes for a second-quarter closing, Garcia said.
Indiana Toll Road Concessions, Inc., a Macquarie subsidiary, paid Indiana $3.8 billion for the 75-year lease in 2006, making it the largest privatization of a public asset to date at the time.
Since then, ITRCC has struggled with an aggressive debt structure weighed down with interest-rate swaps that morphed into a $2.15 billion liability, coupled with lower-than-expected traffic projections following the post-2008 recession.
IFM will be required to stick to the terms of the original deal, including toll rate schedules. Garcia said the firm is confident that it will succeed where ITRCC failed.
"The capital structure we're using is much more conservative," said Garcia, who said the company will be issuing commercial debt to finance the acquisition. "The asset performed pretty well (since the 2006 purchase) but that level of debt was not able to be serviced," he said. "The asset has grown significantly at well, so the value has increased."
The toll road came on the market at a good time, according to Steve Park, an associate with Ballard Spahr LLP who focuses on public-private partnerships.
"Rates are low and it's an attractive time to get an asset," said Park.
"IFM is a pension fund and they like to diversify and this is a type of asset that doesn't come along very often; they were going to do whatever they needed to do," he said.
Other states that have toll roads are also likely watching closely, said Jonathon Gifford, director of George Mason University's Center for Transportation Public-Private Partnership Policy.
"Those states are paying attention today because valuing these properties is really hard, and we haven't had a lot of experience with that," Gifford said.
"Everyone was looking at this very closely to see what would happen and this is a huge number," Park said. "I think the whole industry was very eager to see what would happen. The end result is a good one, certainly for Indiana.
"In terms of the industry, you can see that if you run into trouble, bankruptcy is never an ideal solution but at least it's always there," Park said.
Gifford recalled that ITRCC's original 2006 bid of $3.8 billion came in $1 billion higher than the next closest bid at the time.
"The $3.8 billion was a real headline-grabber at the time, but the $5.72 billion is a really surprising number," he said. "This was a surprise in 2007 and this property continues to surprise."
