The TIFIA workout

Credit assistance from the Transportation Infrastructure Finance and Innovation Act (TIFIA) programme is key to the success of public-private-partnerships (PPPs) in transportation in the US.

While TIFIA support has been used relatively sparingly thus far, the announcement by the US Department of Transport (USDOT) in July 2012 of $1.75 billion in newly-authorised funding availability over the next two years under the MAP-21 transportation bill should be a significant market changer. Project sponsors were encouraged to submit letters of interest as soon as practicable to take advantage of the streamlined, less subjective application process – but what about the recent uptick in distressed TIFIA-financed projects?

This summer, a restructuring specialist was hired by Transurban’s Pocahontas Parkway project company to potentially negotiate with TIFIA and its bank lenders, and, in June, Fitch downgraded a TIFIA loan to the Louisiana Transportation Authority to a CCC rating. With the significant changes to the TIFIA programme’s application process and new, particular emphasis on the creditworthiness of the borrower, Congress seems to be saying it really, really cares that the loans will be paid back. With TIFIA appearing to want to act more like a bank and focusing on reimbursement, what can senior lenders expect from TIFIA when projects are in financial trouble?

ABILITY TO REPAY

TIFIA loans have the characteristics of both senior and subordinated debt: they are subordinated in that they are paid from residual cash only after the senior debt has been fully serviced. If a “bankruptcy-related event” (BRE) occurs, however, the TIFIA loan elevates in priority to be pari passu with senior lenders and cross-defaults with the senior loan agreement. Generally speaking, a BRE occurs if (1) the project misses two consecutive TIFIA mandatory debt-service payments, and (2) the borrower or TIFIA lender files for bankruptcy relief for the project. Unlike with the failure to make typical subordinated debt payments, the senior debt may cross-default after two mandatory TIFIA payments are missed. Rating agencies, therefore, assess a project sponsor’s ability to repay the senior debt and meet the TIFIA mandatory prepayments when they rate senior debt to TIFIA-financed projects.

The bankruptcy of the South Bay Expressway, a 9-mile toll road in San Diego, California under a 35-year concession to private South Bay Expressway LP (SBX), was the first time the TIFIA “springing parity” clause was tested and remains the strongest precedent for similar future restructurings. The $658 million project, which suffered from significantly lower than anticipated revenues, originally received a $140 million TIFIA loan, as well as $130 million in private equity and $340 million from a 10-bank syndicate. By the bankruptcy filing in May 2010, the outstanding balance of the TIFIA loan was $172 million. That was the first bankruptcy in the history of the TIFIA programme, but the “springing parity” clause was not challenged by senior lenders or by the Bankruptcy Court.

As part of the plan of reorganisation confirmed by the Court in April 2011, the original equity was wiped out and TIFIA’s debt remained on par with the senior banks. Coming out of bankruptcy, the bank lenders and TIFIA held 100 percent of the restructured (i.e., significantly reduced) debt (at higher interest rates) and owned all of the equity in the reorganised company. The basis for the allocations between the bank lenders (68 percent) and TIFIA (32 percent) was the pro rata share of the outstanding debt as of the bankruptcy filing in May 2010. The ultimate recoveries for the lenders, therefore, depended on the future performance of the toll road.

WARY

Given TIFIA’s low interest rates, flexible repayment terms and ability to now finance up to 49 percent of a project’s costs, the “springing parity” clause is what banks are likely to be most wary of when financing with TIFIA. In South Bay, USDOT, represented by the Department of Justice, did not bring a motion or objection of any real substance, suggesting that TIFIA was successfully engaged prior to the actual bankruptcy filing by the senior lenders.

According to South Bay’s First Day Motions, the borrower tried to negotiate for more than three months with the “key stakeholders” to avoid a chapter 11 filing. While South Bay may not have been able to reach an overall settlement to avoid bankruptcy, the extended negotiations were not wasted time. Indeed, as projects get into financial trouble prior to actual payment defaults, understanding the TIFIA lender’s motivations in connection with a potential restructuring is important.  We know that, like anyone else, TIFIA wants to be reimbursed, but TIFIA also may care about the timing of a restructuring, or wish to avoid being brought into a bankruptcy proceeding.

However, while the flexibility to defer scheduled loan payments in favour of repaying senior debt may sound great to senior lenders and sponsors looking for temporary relief to project cash flow disruption, extended deferral periods may result in significantly increased debt and credit risks, adding pressure to the later years of a project. Senior lenders may want to act quickly before their debt’s credit rating goes down. So, if neither TIFIA nor the borrower is in a hurry for its own agenda, what can senior lenders do to put pressure on the other stakeholders to workout a distressed transportation project?

While USDOT always has had oversight responsibility for all projects that it funds, now, under MAP-21, USDOT must provide written performance reports on projects that use TIFIA funds, indicating further that the TIFIA lender is more focused on reimbursement and the financial success of its projects. It also signals a greater willingness on TIFIA’s part to address financial difficulties earlier in order to rank equally with the senior lenders.

NEXT PRECEDENT

Transurban’s June hiring of a restructuring specialist regarding Pocahontas 895, an 8.8-mile toll road located in southeast Richmond, Virginia, signals that Pocahontas Parkway may become the next precedent for restructuring a TIFIA-financed project. Transurban announced in June that it had written down the value of its holding in Pocahontas Parkway to zero and will book a related “impairment charge” of $139.7 million. While a TIFIA payment is due in December 2012, no bankruptcy triggering event is anticipated until several months afterwards. The amounts at risk are roughly the same as with South Bay Expressway. Now that a financial adviser has been retained by the borrower, discussions with lenders and regulators should take place over the ensuing months.

As with any workout, secured lenders have many options to exercise their leverage against a borrower, such as requesting inspections of books and records, issuing a demand to raise toll rates, demanding an equity infusion or requesting/demanding that the borrower hire a chief restructuring officer or financial advisory firm. However, the approach in TIFIA-financed projects may be a little different. Whatever the strategy ends up being, the senior lenders will want to ensure that any actions in connection with restructuring the project, including any potential sale or other disposition of the project, do not trigger a bankruptcy-related event so that the borrower’s obligations under its TIFIA Loan Agreement become pari passu with its obligations under the senior debt.

In addition, with TIFIA-financed projects, senior lenders also may be able to exert political pressure on the borrower, especially since one of the remedies available to TIFIA after an event of default is that TIFIA may suspend the borrower from further participation in any TIFIA-administered programme. After passage of MAP-21, that may be the biggest pressure point of all.

Timothy W. Walsh and Erich Peter Eisenegger are partners in the New York office of the international law firm of McDermott Will & Emery LLP focusing on all aspects of restructuring transactions, including representing US and foreign companies, financial institutions, project sponsors, governmental authorities, and insurance companies in a broad range of bankruptcy and project finance matters