This article is part of a series spotlighting The Bond Buyer’s ten 2020 Deal of the Year award winners, running from December 9 through 15. One of these honorees will be chosen as our national Deal of the Year at a virtual event taking place December 16. For more information on the Deal of the Year winners and how to obtain a complimentary pass for the virtual event, click
The Arizona Industrial Development Authority’s $237 million Lincoln South Beltway deal earned the Public-Private Partnership Deal of the Year Award by using an innovative structure to deliver a project that was long overdue and not possible by more conventional means.
The March issuance of debt, rated Aa2 by Moody’s Investors Service, was noteworthy in both how it came together and the ends it helped achieve. The Lincoln South Beltway Project will construct a new 11-mile east-west freeway south of Lincoln, Nebraska, and it will be financed in a way that doesn’t infringe on state borrowing limits or expose investors to undue credit risk.
“It’s something that's replicable and can be done again,” said Michael Newman, a managing director at Hilltop Securities, who served as financial advisor on the deal.
The project was necessary and had been sought for decades to address increased traffic flow, conflicts between local and regional trips, and challenges associated with heavy truck traffic through residential neighborhoods in the city. Newman said trucks rattled the windows of homes and presented a safety risk to neighborhoods.
“No one questioned the need for the beltway,” he said, explaining that it couldn’t get done because Nebraska’s constitution restricts state indebtedness in most cases to only $100,000. But at the same time, pay-as-you go financing was out of the question as well because the price tag was too high.
“It was up to you to figure out the mousetrap, or how it would work,” Newman said.
The deal was made possible and found favor with rating analysts because of the buy-in from legislators, Newman said, noting that large transportation projects are sometimes controversial.
Under the financing structure worked out by the deal team, Hawkins Construction will perform work that entitles the company to progress payments paid by the Nebraska Department of Transportation in the form of deferred contract payment certificates (DCPCs). A special purpose vehicle then buys the DCPCs from Hawkins to pay the company.
The SPV is a bankruptcy-remote limited liability company incorporated in Delaware. The SPV was organized to purchase DCPCs from the contractor and, in turn, sell the DCPCs to the trustee agent on behalf of the issuer.
The bond proceeds ultimately pay for the DCPCs by funding a collateral account, which also receives payments from NDOT after approval by the state legislature, which then repays the bondholders.
The structure means that while the debt isn’t considered to be the state’s for constitutional purposes, it is also not the responsibility of Hawkins. Bond counsel issued an opinion that the DCPCs sold by Hawkins to the SPV would not be part of the Hawkins estate in the event the company entered a Chapter 11 bankruptcy.
“Ultimately what we were able to do was protect the bondholder against the credit risk of Hawkins,” Newman said.
Newman said Hawkins wasn’t familiar with a structure like this at the start of the process, but has since mentioned being interested in deploying it elsewhere, working with other issuers.
The deal has built in flexibility for construction progressing either more quickly or more slowly than anticipated. The project is scheduled for completion by the end of April 2024.
