PWF Blog

PWF Blog (4/3/15)

Indiana Toll Road Privatization: Australian Fund Plunges Into U.S. Infrastructure

by William G. Reinhardt, editor, Public Works Financing newsletter

The sale of the Indiana Toll Road (ITR) lease for $5.725 billion to a large Australian infrastructure fund on March 11 has sent shivers of anticipation through the global privatization community.

Here finally is a large, long-term, GDP-linked investment opportunity in the largest economy in the world—and in a state whose economy is surging.

The targeted return on equity, $3.2 billion (57%), is said to be about 10%, apparently enough to keep the fund’s nonprofit investors happy.

Further, the auction winner, Australia’s IFM Global Infrastructure Fund, managed by IFM Advisors, is over-flowing with public pension fund money to invest, and ITR solves some of that problem.

The private auction is done and the sale is complete. The winner now needs only final approvals from government, including the business-like Indiana Finance Authority (IFA), ITR’s owner. An IFA spokeswoman says it will make its decision before the financial close, now set for late summer or fall.

IFA’s primary concern is operations, and IFM has made an agreement with the existing operator to continue in that role. The Indiana Toll Road Concession Co. (ITRCC) has been managing the highway and $460 million in capital projects since 2006.

IFM’s bid was signed by its executive director, Michael Kulper, an Australian banker who formerly was President of Transurban North America, where he led the development of 495 Express Lanes and 95 Express Lanes.

Those long-term toll concessions together are worth about $3 billion, Transurban says. They are the initial links of a planned managed lanes network serving northern Virginia commuters in the Capital Region of Washington, D.C.

Macquarie Capital is advising IFM Investors. In addition to losing its share of a $760-million equity investment in ITR, Macquarie funds own half of the Dulles Greenway toll road in Virginia and 22.5% of the Chicago Skyway, which connects to the ITR. Neither has ever made a profit.

A One-Off Deal?

For all the excitement, the ITR sale isn’t likely to re-energize the toll road privatization market in the U.S., says a banker working on a competing bid. The big equity investment made the ITR deal bankable, but probably won’t be repeated on other potential toll road privatizations, he says.

Also, while the ITR is designated as an Interstate, the 60-year-old road has no federal funds invested, which would not be the case on most other transactions.

The large equity investment means IFM’s nonprofit funds are taking all of the revenue of risk. Its purchase price for ITR assumes a 31x return on EBITDA, which works out to about $320 million a year.

That seems ambitious. EBITDA last year was $182 million. The ITR never covered its costs under state control, and it never made a profit under private management. IFM’s bank debt is rated investment grade only because of the large equity commitment, says a rating agency analyst.

The Bidders

There were three private bids for the 66 years remaining in the ITR concession (whose original terms, signed in 2006 with former owners Cintra and Australian bank Macquarie, will govern the new owners).

The second-low offer was about $5 billion from Cintra, which, as the current operator, was widely viewed as the likely winner of the auction. Cintra was teamed with Hastings Fund and the Canadian Pension Plan Investment Board. The pension manager is Cintra’s partner on Highway 407, a lucrative toll concession in Toronto.

The third bid, from Abertis and Borealis Infrastructure, was well below Cintra’s. As IFM is now, Abertis was flush with cash in 2008 when it offered $12.8 billion to lease the Pennsylvania Turnpike. Lucky for the Spanish toll road operator, the procurement expired for lack of legislative support just before the financial crash hit Pennsylvania.

A public bid was made too late by two Democratic counties at the west end of the toll road that believe they can make a bundle by forming a new public toll authority that they would control. Over 60% of toll revenue from ITR comes from trucks; truck traffic is growing, and most of the trucks are from out of state.

Bankers working with Lake and LaPorte counties and operator Globalvia put together an all-debt offer of $5.2 billion, to be raised by forming a toll authority and issuing $5.6 billion in public revenue bonds (including $400 million in reserves). The bankers estimate the cost of funds would be below 5%, tax-exempt.

Capital Spending

The 157-mile-long Indiana Toll Road opened in 1956. Pavement and bridge conditions currently are better than required in the concession contract. That’s mainly because ITRCC spent heavily  on upgrades, including widening the road and upgrading toll collections.

The timing and amount of future capital spending needed to keep the road in good condition will substantially affect IFM’s returns. Rather than detailed specifications, the lease requires IFM to meet level-of-service guarantees, which provides some latitude on the scope and pace of capex. The performance specification was included in the original lease partly to increase the up-front concession payment.

The Risk of Politics

Infrastructure privatizations and P3s in the U.S. are vulnerable to changing political winds. Former Gov. Mitch Daniel nearly lost a fight with his legislature over the original ITR lease, even though it guaranteed $3.85 billion in new money up front, most of which was used on highway construction during the recession.

Conversely, the sale to IFM Investors delivers a windfall to hedge funds, who hold about $6 billion in debt and swap termination fees on ITR.

Indiana’s Governor, Mike Pence, a conservative Republican, who is held out to be a Presidential candidate, is under pressure from the counties to return the ITR revenues to public control. They hope they can gain traction by protesting foreign ownership of the lease.

Under private operation, the lease signed in 2006  by IFA  has allowed tolls to more than double since then. Future increases are indexed to national GDP or 2% inflation, whichever is higher.

A lawyer supporting the counties’s bid claimed that IFA “stuck a knife in backs of all Hoosiers when it supported profits going offshore rather than being reinvested in northwestern Indiana.”

Macquarie’s equity analyst Ian Myles called the original transaction: “Acquiring America.” The ITR corridor contains 15.5% of the U.S. population. It used to be called “the Mainstreet of the Midwest.”

Anything can happen in politics.


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