The public private partnership that redeveloped the LBJ Freeway in Dallas is joining the parade of toll-road refundings.
LBJ Infrastructure Group plans to price $1.2 billion of taxable bonds Wednesday and Thursday through conduit issuer Texas Private Activity Bond Surface Transportation Corp.
The deal, pricing through negotiation with book runner BofA Securities and co-senior manager RBC Capital Markets, will refund the group’s Transportation Infrastructure Finance and Innovation Act loan for savings and ease pressure on near-term debt service.
In removing TIFIA-related restrictions, the 2020C bonds create a single, senior-lien debt structure. The bonds will come with three bullet maturities: a $350 million bullet maturing in 2027; a $250 million zero-coupon bullet with a 2030 maturity; and a $584 million bullet with a 2035 maturity.
The bonds are rated Baa3 with a stable outlook by Moody’s Investors Service and BBB-minus by Fitch Ratings. Both ratings — at the lowest investment grade — come with stable outlooks.
The deal comes with caveats due to uncertainty over how the economic recovery will ensue.
“Like all managed lanes, LBJ has been severely affected by coronavirus and related social and economic shutdowns and restrictions imposed by various levels of government,” said Fitch Ratings director Scott Monroe, who headed the rating team. “Year-over-year traffic losses peaked in April at 68% but improved to 42% and 39% in June and July, respectively, as restrictions eased and economic activity recovered. The recovery to date has caused the facility to outperform Fitch's rating case assumption of a 75% year-over-year loss in 2Q20. Instead, the facility's traffic was down 58% for the quarter.”
Despite those improvements, “a steady path to recovery is now looking unlikely as some restrictions have re-tightened,” Monroe added. “As a result, it remains to be seen whether the facility's initial outperformance versus Fitch's rating case will persist into the remainder of the year and 2021.”
"There is little possibility of upgrade of the ratings," Moody's wrote in its rating report.
“The Baa3 rating of the new Series 2020C bonds reflects increased leverage at the senior lien level caused by the proposed transaction that would also remove the subordinate and accommodative payment obligations of the existing TIFIA loan,” said Moody’s analyst Earl Heffintrayer. “The rating reflects that in order to voluntarily repay TIFIA obligations at this time, LBJ will employ a riskier debt service profile that includes bullet maturities and capital appreciation bonds.
“The proposed CABs provide benefit of keeping fixed debt service requirements low in the next few years revenue from the company's managed toll lanes recover from COVID-19 caused traffic disruptions, but also leads to higher equity distributions in the near term at the expense of increased total leverage,” Heffintrayer added.
Moody's also placed the Baa2 rating of $545 million of LBJ Infrastructure Group 2020A and 2020B senior secured revenue bonds on review for downgrade, reflecting the proposed restructuring that puts all debt at parity with existing senior lien bondholders.
"A downgrade of the Baa2 rating on existing senior lien bonds is likely to occur if the planned sale of Series 2020C bonds is completed," Moody's wrote.
Fitch, when it rated the new bonds on Friday, affirmed its BBB-minus rating on the project's outstanding senior bonds.
"The proposed debt structure is entirely senior lien, but is back-loaded with sizable and unhedged bullets, thus introducing refinance and interest rate risk," Fitch wrote.
The 2010, $850 million TIFIA loan was at 4.22% interest, according to financial statements included in the preliminary official statement. Loan terms added interest payments to the balance for the first 10 years, bringing the balance to $1.16 billion. Interest payments had been scheduled to begin on Dec. 31.
In its own road show presentation, the partnership cautions that “while the company currently has funds available to it (including the Debt Service Reserve Account) to pay debt service on its outstanding debt when due, there is no certainty that such funds together with new toll revenues collected will be sufficient to pay debt service or that the continued spread of COVID-19 in the United States, and, in particular, Texas will not have a material adverse effect on the company’s operations and its financial condition.”
Before the declaration of a health emergency on March 13, the 13.2-mile expansion of LBJ Freeway or Interstate 635 across Dallas’s northern suburbs was out-performing budgeted revenue expectations by 4%.
“On a year over year basis, traffic and revenue gains were robust at 9% and 22%, respectively,” Monroe said. “The strong performance reflected the region's robust population and employment growth, driving traffic levels to new highs.”
The project’s original financing came through four main sources, including an $850 million TIFIA loan, $490 million from the Texas Department of Transportation, $664 million from investors and $615 million from private activity bonds.
LBJ Infrastructure Group was awarded a 52-year concession by Texas Department of Transportation for the project that opened for traffic in 2015.
“The project is relatively new condition and therefore has rather limited capital needs over the intermediate term,” Monroe said.
The project uses a dynamic pricing policy with flexibility to change tolls based on real-time traffic conditions. The rates are adjusted for heavy traffic until they reach a cap. The cap can be exceeded if speeds fall to 50 mph.
“The Baa3 rating positively considers the managed lane's fundamental strengths as a congestion reliever in a densely populated, primarily commuter corridor in a growing economic service area in Dallas,” Heffintrayer said. “Revenues now benefit from the managed lane's central location in a regional managed lane network. The generally supportive concession terms with a clearly defined toll rate setting mechanism that includes dynamic tolling is essential to driving long-term revenue growth as it allows the sponsors to adjust toll rates every five minutes to maintain average traffic speeds above 50 mph or traffic volumes below certain thresholds.”
Austin-based Cintra U.S., the American arm of Spanish infrastructure giant Cintra, is the lead partner in the LBJ consortium. Cintra is part of Madrid-based Ferrovial, whose infrastructure assets include London's Heathrow Airport and several other major airports. The other partners are APG Asset Management, a Dutch a pension fund asset manager, and Meridiam Infrastructure, a global investor in infrastructure projects.
The project, a complete replacement of the 40-year-old LBJ Freeway, was at one time the largest private public partnership to be developed in the U.S.
The project began near the end of 2010 and was opened in September 2015, on budget and three months ahead of schedule.
The new LBJ Express added six toll lanes in the I-635 section, and four on the I-35 section.
