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CTRMA acquires gap financing for toll projects

Thursday, May 1, 2008 by Kimberly Reeves

The Central Texas Regional Mobility Authority has picked JPMorgan to provide gap financing for the build-out of five toll projects still on the table for construction.

At ultimate build-out, the CTRMA is predicting a funding gap as big as $1.5 billion, even after the agency taps into bonds and federal TIFIA (Transportation Infrastructure Finance and Innovation Act) loans. With no additional relief on the horizon from state or federal sources, the CTRMA went out last year to find a partner to provide gap financing through pension and infrastructure funds.

Five companies made proposals to the agency: Balfour Beatty Capital; Citigroup; Goldman Sachs; JPMorgan; and Morgan Stanley.  Respondents were scored on experience in innovative public finance transactions; the effectiveness of proposed finance structure; and the CTRMA’s objectives of a partner that both understood the market and was willing to be transparent.

The CTRMA likes to refer to its funding in terms of “buckets” that sometimes spill over into each other. In this case, the third bucket is considered the subordinated, or patient, debt that would be paid back last. At an interest rate of 5.3 to 6 percent, this debt is still far more economical than the pace of inflation, which is driving up the cost of construction, said Executive Director Mike Heiligenstein.

The most important aspect of the deal is that the CTRMA continues to own and operate the road. It also continues to set tolls and manage any profits.

“I would describe this as a model that moves us past just thinking in terms of concessions and privatization and back toward the public finance model,” Heiligenstein said after Wednesday morning’s meeting. “With a strategic investor of this nature, we are complying with (Senate Bill) 792. At every conference I go to, I’ve been told we’re not going to be able to do this, unless we do concessions. We’re going to prove to them that there is a place to go.”

Pension and infrastructure funds are looking for steady, moderate, predictable profits. Heiligenstein said it is easier to guarantee that type of performance in a growing region like Central Texas, where the CTRMA can depend on rising population numbers before it has a need to raise toll rates.

Work at this point will include negotiating an agreement with the investor team that the CTRMA board approves. Concurrently, the agency also will meet with TIFIA and TxDOT to determine what funding will be available for such a package.  A short-term loan with local banks will be finalized to handle soft costs.

Debt would be issued in late fall. How favorable those terms will be will depend on traffic-and-revenue forecasts, as well as cost and engineering data.

Commissioner Sarah Eckhardt, who is following the process closely, was on hand at Wednesday’s CTRMA board meeting. Eckhardt’s concern will be to make sure the financing stays true to the CAMPO amendment that required all profits from any toll road to be spent on improvements in that toll road’s corridor. In other words, if East Austin residents paid into the system, they would also reap the benefits.

This early in the process, the CTRMA and JPMorgan cannot tell Eckhardt whether the gap, or mezzanine, financing will be done on an individual or aggregate basis.

“I’m deeply concerned about tax equity,” Eckhardt said. “If a project can’t stand on its own – if it doesn’t have the current ridership to make it work in the current financial climate – then maybe there isn’t such an imperative that it needs to be built right now. We don’t need to be building something that can’t stand on its own and wouldn’t generate the kind of ridership it needs to pay off debt.”

No one has answers for Eckhardt, but she said she is satisfied that the two sides are being honest with her about their circumstances and process. Nothing has been ruled out in terms of financing yet, and it will not be until fuller ridership projections are completed. Then, the CTRMA really will be able to tell the “ugliest baby in the nursery,” said Eckhardt, alluding to the better of two difficult choices.

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