Termsheet: On the road again

Infrastructure projects aren’t typical targets for distressed debt investors, but Strategic Value Partners has found such structures, particularly toll roads, to be favourable investments.

The Greenwich, Connecticut-based asset manager gained the rights to operate a stretch of a Texas road running from San Antonio to Austin after the highway’s owner emerged from Chapter 11 proceedings in late June.

SVP identified a 41-mile section of State Highway 130 – an asset backed by Madrid-headquartered Cintra Infraestructuras and San Antonio-based Zachary American Infrastructure – as a good investment and ended up playing a large role in the workout during SH 130 Concession’s bankruptcy case, which began in March 2016.

The deal involved $1.65 billion in liabilities, according to court papers. SVP scooped more than half of the debt for an average price of 50 cents on the dollar, mainly from Spanish banks, and led the restructuring, Victor Khosla, the firm’s founder and chief investment officer, says.

The original investors behind the road – which, at 85 miles per hour, lists the highest speed limit in the US – reached a $1.3 billion financing arrangement with the state of Texas in June 2006 to pay for construction and maintenance. Cintra and Zachary were then party to a 50-year concession in March 2007, giving them the exclusive right to charge tolls in an agreement that took effect once the road opened in October 2012.

However, the tollway’s traffic fell short of projections and SH 130 filed for bankruptcy after it struggled to service its debt load. It also faced potential defaults under its senior credit facility and interest-rate swaps.

Through the reorganisation, SVP and other debt holders received paid-in-kind notes and equity. SH 130 knocked $1.1 billion of debt off its balance sheet as it emerged with just $260 million in exit financing provided by Goldman Sachs and $250 million of PIK debt. The rest of the debt was converted into equity.

“PIK notes are a vestige of when the banks were working on the restructuring with us. When companies come out of bankruptcy you want them de-levered,” says Khosla, adding: “[SH 130] is a duopoly with a 45-year concession. The Austin, Texas, area is one of the fastest-growing areas in the US. We started investing in distressed debt backed by infrastructure five or six years ago.”

Following Chapter 11, SH 130 Concession is now planning maintenance and improvements funded through the exit facility.

“This is a new beginning for this company. While they were in the process of bankruptcy, a lot of things just didn’t get done,” says chairman Harry Quarls.

Now there are possibilities to build connecting roads from adjacent routes and the company is looking at consumer-focused issues, such as toll prices during different times of the day and frequent-user benefits, adds Quarls, citing traffic projections of just above 6 percent for passenger-vehicle traffic and about 5 percent for commercial trucks.

“It’s a Texas growth story,” he says.