Mortgage Crisis Chills Market for Road Privatization Schemes
By Sean McNally, Senior Reporter
This story appears in the April 21 print edition of Transport Topics.
Wall Street’s subprime mortgage crisis has chilled the market for private infrastructure funding by making it more expensive for investors to get financing, according to interviews with several executives.
The subprime meltdown has caused lenders to be more cautious and pushed them to raise interest rates, increasing the cost of borrowing the money would-be privatizers need to complete their transactions.
Those increased costs either limit how much a private entity firm can borrow to put a deal together, or require higher tolls on the leased highways.
“What has happened is a perfect storm,” said Conor Kelly, managing director and head of infrastructure finance in the Americas for Dublin, Ireland-based Depfa Bank.
Kelly said the problems are “more or less a direct result of the subprime issue and the lack of confidence in the credit markets globally from the subprime issue . . . Bear Stearns issues [and] liquidity issues, generally.”
To make a public-private partnership happen, a private concessionaire must put up some of its own equity, but the majority of the lease price is usually borrowed from banks (see story, below).
Bond insurers, or monolines, are a key part of most deals, and they have been downgraded, Kelly told Transport Topics.
“A lot of the infrastructure revenue bonds were enhanced or insured by the monolines, and that is no longer available,” he said. “And because of the subprime issue, there have been liquidity issues.”
He said loans that would have had interest rates slightly more than one percentage point above the basic bank borrowing rate now would cost nearly two points more.
The increased cost of borrowing money puts pressure on investors who want to make deals to lease major cash producers, such as the leasing in recent years of the Chicago Skyway and Indiana Toll Road, and potential deals for the Pennsylvania or New Jersey turnpikes.
“These concessionaires still need to secure significant amounts of credit [and] debt to make these concessions work,” said John Foote, a senior fellow at Harvard University’s Kennedy School of Government.
“Despite the fact that the feds are pumping money into the banking sector, from my read of things, the banks are very cautious about making commitments of this size,” Foote said.
“The U.S. markets are now pricing more risk into transactions,” said Gary Gray, a finance professor at Penn State University and a former investment banker. Gray told TT that private borrowers must pay “significantly higher” interest rates than public entities.
Gray said the over time — the difference in interest rates on public debt versus private debt — “can transfer directly into lower tolls” for motorists and truckers.
“When you look at a long-term financing — 50, 55, 75, 95 or 99 years — given the cost of capital differential, the importance of it just balloons up,” Gray said. “Basically, if you had to raise the [toll] rates for a corporate concessionaire by X for them to do the deal, to get the municipal entity would only have to raise the rates by something like two-thirds of X.”
Proponents of privatization and concession deals have said the need for toll increases would be limited because private operators run a highway more efficiently, but Gray rejected that argument.
“A corporate concessionaire might be the best operator in the world, and yes, there are efficiencies, but their efficiencies can’t come close to wiping out the inefficiencies of the different costs of capital,” he said.
However, there is still money available if the price is right, and infrastructure projects remain good deals for investors because the underlying investment yields a steady revenue stream, proponents said.
“People are willing to lend the money if they’re going to get a good return,” said Peter Humphreys, partner and securities attorney with law firm McDermott, Will and Emery. “And I think these are the types of deals that can get put together. It may be that the returns to lenders are higher than Indiana, but it may not.”
Brian Chase, vice president of Carlyle Group, which has an infrastructure investment unit, said he didn’t think credit difficulties were “very significant . . . because of the nature the infrastructure need.”
“It’s just that the U.S. banks are a little more cautious than they were,” Chase said. “The European banks that have a little more experience with private financing of infrastructure are still loaning money and willing to make commitments to projects that are good projects.”
Those good projects include construction of new highways or bridges.
“New projects seem, to me, to be in a situation where the government is hurting for money and they don’t want to raise taxes; putting the private capital to work to build new projects seems to have a lot to offer,” Humphreys said.
Gray agreed that “private capital is perfect for a lot of situations out there.”
An example of private capital being used on new capacity, or a green field project, are the express toll lanes planned for the Capital Beltway in the Virginia suburbs of Washington, D.C. Chase said Carlyle is investing in the project, and Depfa is acting as a financial adviser, Kelly told TT, who called it a “very, very high-profile landmark transaction in the U.S.”
The credit situation will eventually stabilize, officials said, and again make it palatable for private groups to get financing for their projects.
“They’re good investments from an investor point of view,” Humphreys said, adding that deals will get done eventually because the deals are so good for investors. “Unlike some of the financial assets, where you’re looking at loans or leases or credit cards or things like that you’re relying on consumers to pay it, this is a road.”
“The New Jersey Turnpike is a good investment because people are going to have to use that road,” Humphreys said. “It’s inconceivable that there wouldn’t be enough traffic to handle the bonds that they’re going to issue, particularly given the time horizons people are talking about.”
The credit issues have been noticed by government officials in Washington on both sides of the privatization issue.
Jim Kolb, majority staff director for House Highway and Transit Subcommittee, said the panel is concerned about “how these deals are structured and frankly there’s been a lot of talk about regulation,” to set parameters on future deals.
Congressional Democrats, notably transportation committee chairman Rep. James Oberstar (D-Minn.) and highways subcommittee chairman Peter DeFazio (D-Ore.), have generally been skeptical of plans to lease public toll roads to private groups.
Jim Ray, acting head of the Federal Highway Administration and a proponent of public-private partnerships, said it appears “the same things that are plaguing a lot of other markets out there are plaguing this one as well: liquidity has become much more difficult.” But he added that he believed with the rapidly changing markets, “it’s not a major issue.”
This story appears in the April 21 print edition of Transport Topics.
Wall Street’s subprime mortgage crisis has chilled the market for private infrastructure funding by making it more expensive for investors to get financing, according to interviews with several executives.
The subprime meltdown has caused lenders to be more cautious and pushed them to raise interest rates, increasing the cost of borrowing the money would-be privatizers need to complete their transactions.
Those increased costs either limit how much a private entity firm can borrow to put a deal together, or require higher tolls on the leased highways.
“What has happened is a perfect storm,” said Conor Kelly, managing director and head of infrastructure finance in the Americas for Dublin, Ireland-based Depfa Bank.
Kelly said the problems are “more or less a direct result of the subprime issue and the lack of confidence in the credit markets globally from the subprime issue . . . Bear Stearns issues [and] liquidity issues, generally.”
To make a public-private partnership happen, a private concessionaire must put up some of its own equity, but the majority of the lease price is usually borrowed from banks (see story, below).
Bond insurers, or monolines, are a key part of most deals, and they have been downgraded, Kelly told Transport Topics.
“A lot of the infrastructure revenue bonds were enhanced or insured by the monolines, and that is no longer available,” he said. “And because of the subprime issue, there have been liquidity issues.”
He said loans that would have had interest rates slightly more than one percentage point above the basic bank borrowing rate now would cost nearly two points more.
The increased cost of borrowing money puts pressure on investors who want to make deals to lease major cash producers, such as the leasing in recent years of the Chicago Skyway and Indiana Toll Road, and potential deals for the Pennsylvania or New Jersey turnpikes.
“These concessionaires still need to secure significant amounts of credit [and] debt to make these concessions work,” said John Foote, a senior fellow at Harvard University’s Kennedy School of Government.
“Despite the fact that the feds are pumping money into the banking sector, from my read of things, the banks are very cautious about making commitments of this size,” Foote said.
“The U.S. markets are now pricing more risk into transactions,” said Gary Gray, a finance professor at Penn State University and a former investment banker. Gray told TT that private borrowers must pay “significantly higher” interest rates than public entities.
Gray said the over time — the difference in interest rates on public debt versus private debt — “can transfer directly into lower tolls” for motorists and truckers.
“When you look at a long-term financing — 50, 55, 75, 95 or 99 years — given the cost of capital differential, the importance of it just balloons up,” Gray said. “Basically, if you had to raise the [toll] rates for a corporate concessionaire by X for them to do the deal, to get the municipal entity would only have to raise the rates by something like two-thirds of X.”
Proponents of privatization and concession deals have said the need for toll increases would be limited because private operators run a highway more efficiently, but Gray rejected that argument.
“A corporate concessionaire might be the best operator in the world, and yes, there are efficiencies, but their efficiencies can’t come close to wiping out the inefficiencies of the different costs of capital,” he said.
However, there is still money available if the price is right, and infrastructure projects remain good deals for investors because the underlying investment yields a steady revenue stream, proponents said.
“People are willing to lend the money if they’re going to get a good return,” said Peter Humphreys, partner and securities attorney with law firm McDermott, Will and Emery. “And I think these are the types of deals that can get put together. It may be that the returns to lenders are higher than Indiana, but it may not.”
Brian Chase, vice president of Carlyle Group, which has an infrastructure investment unit, said he didn’t think credit difficulties were “very significant . . . because of the nature the infrastructure need.”
“It’s just that the U.S. banks are a little more cautious than they were,” Chase said. “The European banks that have a little more experience with private financing of infrastructure are still loaning money and willing to make commitments to projects that are good projects.”
Those good projects include construction of new highways or bridges.
“New projects seem, to me, to be in a situation where the government is hurting for money and they don’t want to raise taxes; putting the private capital to work to build new projects seems to have a lot to offer,” Humphreys said.
Gray agreed that “private capital is perfect for a lot of situations out there.”
An example of private capital being used on new capacity, or a green field project, are the express toll lanes planned for the Capital Beltway in the Virginia suburbs of Washington, D.C. Chase said Carlyle is investing in the project, and Depfa is acting as a financial adviser, Kelly told TT, who called it a “very, very high-profile landmark transaction in the U.S.”
The credit situation will eventually stabilize, officials said, and again make it palatable for private groups to get financing for their projects.
“They’re good investments from an investor point of view,” Humphreys said, adding that deals will get done eventually because the deals are so good for investors. “Unlike some of the financial assets, where you’re looking at loans or leases or credit cards or things like that you’re relying on consumers to pay it, this is a road.”
“The New Jersey Turnpike is a good investment because people are going to have to use that road,” Humphreys said. “It’s inconceivable that there wouldn’t be enough traffic to handle the bonds that they’re going to issue, particularly given the time horizons people are talking about.”
The credit issues have been noticed by government officials in Washington on both sides of the privatization issue.
Jim Kolb, majority staff director for House Highway and Transit Subcommittee, said the panel is concerned about “how these deals are structured and frankly there’s been a lot of talk about regulation,” to set parameters on future deals.
Congressional Democrats, notably transportation committee chairman Rep. James Oberstar (D-Minn.) and highways subcommittee chairman Peter DeFazio (D-Ore.), have generally been skeptical of plans to lease public toll roads to private groups.
Jim Ray, acting head of the Federal Highway Administration and a proponent of public-private partnerships, said it appears “the same things that are plaguing a lot of other markets out there are plaguing this one as well: liquidity has become much more difficult.” But he added that he believed with the rapidly changing markets, “it’s not a major issue.”
