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Builder of Texas roads may default on Indiana project
Posted Saturday, Jul. 16, 2011
By Gordon Dickson
Texas officials are watching with concern as reports surface about a possible default on a $3.8 billion Indiana toll road project being built by the developer that is financing major highway and toll projects in Dallas-Fort Worth, Austin and San Antonio.
Cintra, the Spain-based company that leads a team operating the Indiana Toll Road, has used up most of its rainy-day fun and is running out of money to pay debt. The shortfall is the result of lower traffic -- and lower toll revenue -- than originally forecast, according to financial news reports.
Cintra and its partners are also building the $2.1 billion North Tarrant Express, which involves the reconstruction of Loop 820 and Texas 121/183 in Northeast Tarrant County. Cintra is also the lead partner in the LBJ Express, which includes the expansion of Interstate 635 in Dallas.
The projects include both toll and free lanes.
The company is also lead partner in two segments of the Texas 130 toll road project between Austin and San Antonio.
Collectively, that's about $5 billion worth of road work in Texas, much of it financially structured similarly to the Indiana project -- using tolls to pay off debt over many years.
Cintra acknowledged using a rainy-day fund to pay debt for the Indiana project but disputes reports that it may not make required payments.
"The Indiana Toll Road is not in default, nor is default expected," Patrick Rhode, Cintra U.S. vice president for corporate affairs, said in an e-mail.
"The performance of one project, even in the unlikely case of a default in its debt obligations, has no influence whatsoever in the performance or ability to perform obligations of the same investors in other projects."
While nothing indicates that the Texas projects are at risk, transportation officials are privately expressing concern about whether Cintra and other developers will complete the work, considered an indispensable part of Texas' plan to handle population and economic growth over the next half-century.
Bill Meadows, a Texas Transportation Commission member, has asked for an analysis of the state's 52-year contracts with Cintra and its partners -- NTE Mobility Partners on the North Tarrant Express project -- as it relates to default.
With a default, the project could return to the state, which means that taxpayers and motorists could be left with an unfinished road, according to a Star-Telegram review of the state's contract with the North Tarrant Express developer. If no other developer could be found, public money would be needed to complete whatever portion of the 52-year project wasn't finished.
"It's a poignant reminder of the importance of the contract being constructed properly, because this is what can happen," said Meadows, a Fort Worth businessman and advocate of private road development. "It's important for people to know that our agreements will certainly anticipate that. The people of Texas' interests will be protected."
Rainy-day fund
Cintra and its partner, Australia-based Macquarie, leased the Indiana Toll Road in 2006. The team, ITR Concession Co., paid the state $3.8 billion for the right to collect tolls for 75 years.
In May, a report in the financial publication Debtwire said that the companies had used up about two-thirds of a $150 million interest reserve account set up in 2006 and that the account could be drained by year's end. The account is meant to ensure that the developer can pay bills even when revenue is down, and it must be maintained to keep the group's $4.1 billion in loans in good standing.
Royal Bank of Scotland, the lender, has assigned the project to its workout group to see whether the problem can be resolved, Debtwire reported.
The revenue shortage comes after Cintra and its partner raised tolls dramatically on the road, which stretches 157 miles from Illinois to Ohio.
"The reserve fund was designed to cover financial gaps that occur over long periods of operations, and it is being utilized as anticipated. We continue to meet all financial considerations, and we look forward to providing safe, reliable transportation services on the ITR for motorists now and in the future," Rhode said in the e-mail to the Star-Telegram.
In Indiana, default could mean that the toll road -- which is more than 50 years old -- would simply return to the state. Indiana taxpayers would pocket the $3.8 billion concession fee originally paid by Cintra and Macquarie.
Cintra's contracts in Texas involve roads being built and scheduled to be maintained and expanded numerous times over the next 52 years as the region grows. The contract for North Tarrant Express gives the company the power to raise tolls to pay debt, with the expectation that higher tolls will reduce traffic. A default here could leave residents with an unfinished road and a bill that taxpayers would have to cover if another developer didn't take over.
The current construction on the North Tarrant Express -- the makeover of lanes on 820 and 121/183 and the addition of two toll lanes in each direction -- is expected to be completed in 2015. Future phases, however, including the proposed addition of lanes on Interstate 35W north of downtown Fort Worth, could cost $5.7 billion, according to preliminary estimates.
Given the state's limited highway revenue and with no increases in the motor fuels tax or vehicle registration fees expected anytime soon, if the North Tarrant Express developer defaulted and were removed from the project, the state probably wouldn't complete the work unless it issued additional debt.
What the contract says
For the North Tarrant Express, construction is backed by a $250 million performance bond in case a developer defaults before the road opens, said Kelli Petras, Transportation Department spokeswoman.
Once the road opens, the main protection against financial default is a $40 million debt service reserve fund, which Cintra and its partners agreed to set up, the consortium's contract with the state shows. Cintra's partners in the North Tarrant Express project include Meridiam Infrastructure of Luxembourg and the Dallas Police and Fire Pension System.
The debt service money comes from the developers' own private equity as well as an estimated $400 million pool of funds from the issuance of private-activity bonds.
The purpose of the debt service reserve fund is to give lenders comfort that bills will be paid -- at least for about a year -- in case of financial problems, Petras said. An additional $20 million is set aside for a major maintenance reserve fund to ensure that money is on hand for about 10 years' worth of repair and upkeep, according to the contract.
The North Tarrant Express project includes $570 million in public funds from the state, but none of that money can be used for either rainy-day fund, Petras said. Of the state's commitment, $70.6 million has been paid out for ongoing construction, and $32.5 million is being paid as workers cordon off shoulders, close frontage roads and remove thousands of tons of dirt to make way for new lanes.
Default could occur for various reasons, including failure to pay bills or meet construction deadlines, a bankruptcy filing or an increase in tolls beyond permissible levels. A noncompliance point system grades each violation for seriousness, and the Transportation Department can build a paper trail and determine over time -- typically 30 to 120 days -- whether the developer has persistently defaulted on its agreement or failed to cure any violations.
If the developer is found to be in persistent default, the contract lets the Transportation Department take over operations of North Tarrant Express with no obligation to pay the developer's debts. The department could use the toll revenue, bond programs or state highway tax revenue to complete the project, Petras said.
Risk vs. reward
The idea of leasing American highways, bridges and toll roads to private developers has been a hot-button issue since it was proposed about a decade ago. But it's a risk that officials in Texas and many other states are willing to take.
"States are under pressure because they need the money," said Robert Puentes, a senior fellow at the Brookings Institution in Washington. "It's probably the wrong reason to do one of those deals, but it's the reality. There just may be a crisis moment when they start doing this because they need to plug gaps in their budgets."
Texas, Virginia, Michigan, Colorado and Oregon are among states learning as they go when it comes to structuring contracts with developers, Puentes said. The projects are known as comprehensive development agreements in Texas and public-private partnerships in other states.
Supporters of comprehensive development agreements say that even in case of a default, Texas is getting a bargain on projects such as the North Tarrant Express. The initial $2.1 billion in construction includes only $570 million in state highway funds. The rest comes from an estimated $600 million federal transportation infrastructure loan, bond revenue, and private equity arranged by Cintra and its partners.
Gov. Rick Perry and others believe that the reward outweighs the risk that something could go wrong during the 52-year contract, a longtime adviser said.
"We tried not to micromanage it, but we definitely big-pictured it," said Kris Heckmann, who was a policy adviser for Perry for nine years before co-founding a lobbying and communications firm in Austin. Perry "would just tell them to keep the important principles in mind. Make sure the reward and risk balance out. Don't let us get taken advantage of.
"TxDOT, to their credit, has learned a lot in the past four years," Heckmann said. "It's all about risk and reward. Let's say they've built half the project and go into default. It wouldn't be a disaster for the state, if the state gets the project back."
Gordon Dickson, 817-390-7796