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Major Bridges gets a major PAB

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By Thomas Hopkins, January 27, 2023

The Major Bridges Package One Project was one of the standout US P3 deals of 2022. Developed using an innovative pre-development agreement (PDA) structure, the project entails rehabilitating six bridges in Pennsylvania and took just nine months to get from awarding to financial close.

The project was awarded to the Bridging Pennsylvania Partners (BPP) – a consortium led by Macquarie and S&B – in March 2022. The financing is structured via SPV Bridging Pennsylvania Developer I, in which Bridging Pennsylvania Holdco (Macquarie equity participant) has a 60% share and S&B USA Concessions – Pathways (S&B equity participant) has a 40% share. BPP entered into a PDA with the Pennsylvania Department of Transportation (PennDOT), the grantor, in May 2022. This was followed by commercial close in November and financial close in December. The following bridges are due to be repaired and/or replaced as part of the project: I-81 Susquehanna; I-80 Nescopeck; I-78 Lenhartsville; I-80 Lehigh River; I-80 Canoe Creek; and I-80 Northfork.

Around $1.79B of PABs were issued to finance the project. The PABs priced above par at a total premium of $54.5M, meaning that $1.8B was raised overall. The PABs were underwritten by JP Morgan and Wells Fargo and were issued on behalf of Bridging Pennsylvania Developer I by Pennsylvania Economic Development Financing Authority. Orrick, Herrington & Sutcliffe is legal adviser to the sponsors, while Mayer Brown is advising the underwriters and the grantor legal counsel is Ballard Spahr. Macquarie Capital is financial adviser to the borrower, while Bridging Pennsylvania Constructors, a joint venture between Shikun & Binui – America and FCC Construction, are the EPC contractors. KPMG, Bluebird Advisors, and PFM Financial Advisors are financial advisers to PennDOT.

Alongside the PABs, the project will be financed with $201.8M of equity, $140M of mobilisation and milestone payments from PennDOT, and $150.8M of fixed interest earnings on the deposited debt proceeds will be drawn down in stages during construction. The project has a debt service reserve account (DSRA), which will have sufficient funds to cover six months of debt service. A range of options were considered for financing the project, including short-dated bank debt and a TIFIA loan. The decision to finance the project with PABs resulted from the limited time available to close the transaction, as PABs were thought to be the most efficient route to market for the project.

The sponsors’ equity contributions are backed by an A3-rated letter of credit provider and gearing for the financing is around 90%. The $90M mobilisation payment includes expenses such as the cost of setting up offices, building facilities, and utilities; insurance costs; P&P bonds costs; and the early purchase of materials. The $50M milestone payment will be paid when 65% of the design and construction work is completed, with the earliest payment date set as 1 September 2027.

The 2042, 2057, and 2062 notes are guaranteed by Assured Guaranty under a municipal bond insurance policy and are referred to as the Insured Series 2022 Bonds. The uninsured notes have been rated Baa2 by Moody’s and BBB- by Fitch, while the Insured Series 2022 Bonds have been wrapped to A1 (Moody’s)/AA (S&P). Total debt service for the all the notes issued is $3.98B. The first ten years of bond insurance premiums are paid upfront, while the remaining thirty years of premiums are paid semi-annually at a total cost of $27.8M.

Revenues for the project were always intended to be solely availability-based from the perspective of the sponsors. However, PennDOT initially intended to use tolling on the bridges to generate revenue completely independently from the Major Bridges project. After legal action was taken by members of the communities that would have been affected by the tolls, PennDOT amended its P3 law to ban the tolling of existing free lanes. The legal challenges delayed the project briefly, but are now resolved after the plan to use tolls was abolished.

To be developed under a DBFM concession, the project will have a 5.5-year construction period, followed by a 35-year maintenance period. Availability payments are set to begin in 2028, with minimum payments expected to start at $65.998M in 2028, rising gradually over the life of the project to $178.5M in 2062, before falling to $26.6M in 2064 – the final year of the concession. Approximately 80% of the availability payments are indexed to a fixed rate and 20% of the payments are indexed to CPI. The minimum total revenue expected to be generated from availability payments is $5.68B.

The benefits of a PDA
PDAs are gradually becoming more common in the US as an alternative to the traditional hard bid procurement model. A hard bid typically requires developers to submit a full proposal with committed financing and equity, pricing on availability payments, and a full financial model. The procurer needs to have de-risked aspects of project development such as permitting and technical considerations in order for bids to be priced effectively. Bids are submitted at a fixed price and cannot ordinarily be changed.

By contrast, a PDA is a far more collaborative approach between the developer and the grantor following the selection of the developer on the basis of factors such as experience, rather than a competitive bid. The developer usually assists the grantor in advancing the project to the stage at which it would be when tendered in a hard bid procurement. The grantor also ordinarily does not have an entirely rigid view of the project’s design specifications and cost and works with the developer to finalise the details of the project.

The Major Bridges PDA extended to preparing a development plan and a risk management plan; agreeing the scope and schedule of the project with PennDOT; assessing PennDOT’s pre-development work; completing the necessary design work to deliver final, fixed pricing for the project; performing work necessary to reach financial close; complying with permits secured by PennDOT and National Environmental Policy Act (NEPA) requirements; assisting with NEPA approvals; and supporting PennDOT with community engagement.

The procurement model for the Major Bridges project is notably different from the strategy employed for the Rapid Bridge Replacement Project. Sponsored by Plenary Group and Walsh Investors, the project reached financial close in 2015, raising $721.5M of debt. As Jennie Mu, an associate director at Fitch Ratings, says: “The prior project to this was the Rapid Bridge Replacement Project, which was not procured under a PDA. I think that PennDOT has learned a lot of lessons from that project in terms of managing scheduling complexities and grouping projects by complexity compared to 500 bridges that were included in the earlier project. With the PDA process for the Major Bridges project, the sponsors have been able to advance design and identify utilities and any third-party co-ordination issues.”

In 2019, PennDOT publicly identified some adjustments that could be made to its procurement process in relation to the Rapid Bridge Replacement Project. Some of the recommendations included changes to asset selection such as considering factors beyond design and construction like utilities, permitting, rights-of-way, and traffic impacts. PennDOT also noted, amongst several other points, that a more detailed assessment of risk allocation between procurer and developer should be conducted, that significant time should be set aside for project scoping, and that ‘criteria for non-compliance in design, construction and management activities that have reasonable cure periods and penalties’ should be established.

The use of a PDA for Major Bridges may help to eliminate issues such as delays and unforeseen construction issues. The project has been substantially de-risked from a technical standpoint, with a tailor-made approach applied to the contractual structure to ensure appropriate risk allocation. Around 65% of the project design has also been completed, where only 30% would have been completed under a typical hard bid. Much more is, therefore, known about the construction schedule and the work required for each bridge. The PDA has also accelerated the project’s development, as environmental approval for the project was only granted in October. Procurement under a hard bid model could only have started following environmental approval, whereas the PDA could begin before this permit was received and commercial close was possible in November.

Discussing the advantages of the PDA, Sam Headon, managing director of project development at S&B, says: “The PDA gives more flexibility in terms of addressing the challenges that large P3 projects inevitably have. For the PA Major Bridges Program, there were a number of challenges that emerged over the twelve months, not as a function of the procurement, but as a function of the broader environment in which the project was procured. The construction industry experienced escalating construction costs; the project had legal challenges that resulted in prohibiting of tolling and a delay in the process; and the financing environment was unpredictable. Had the project been procured through a hard bid model, it would been more difficult to manage the process. The PDA process allowed us to collaborate with PennDOT to develop solutions for the project that could best address the headwinds that we had.”

The Proximo perspective
The mere fact that the BPP consortium issued $1.8B of PABs successfully in December 2022 is an achievement. Yields on US Treasuries have increased in the wake of rising interest rates, constraining the liquidity of the PABs market. For example, at the time of writing, the yield on 30-year US Treasuries is 3.67%. Also affected by broader economic uncertainty, the PABs market has been so complex to navigate over the past year that projects like JFK Terminal 6 and JFK Terminal 1 opted to preserve the ability to issue PABs at a later stage, rather than issue them at financial close.

The Major Bridges PABs priced at a premium and compare positively to existing PABs for the Rapid Bridge Replacement Project. A 2042 note with a 5% coupon issued to finance the earlier project currently has a yield of 5.063%, according to data from recent trades from Electronic Municipal Market Access (EMMA). A Major Bridges note with a similar remaining repayment term has a yield of 4.340%. Notably, the Major Bridges note has a higher coupon (5.250%), meaning that it is pricing more competitively.

In light of challenging municipal bond market conditions, it is unsurprising that the sponsors had to make use of bond insurance on three of the longer-dated notes. Doing so was likely necessary to secure sufficient interest from bond investors and comes at a significant cost to the project. This cost is, however, offset slightly by the more aggressive pricing on the insured notes.

The greatest risk to the project following financial close will almost certainly be the construction schedule. The six projects are spread across Pennsylvania and vary considerably in nature. All six bridges must also be completed for the project to reach substantial completion. Fitch classifies completion risk as ‘high midrange’, but notes the experience of the EPC contractors with delivering projects of this kind.

Referring to some of the mitigants to completion risk, Anubhav Arora, a director in global infrastructure and project finance at Fitch Ratings, says: “It is a 5.5-year construction schedule and the developer must complete all six bridges in order to achieve substantial completion. Some of the bridges are moderately complex, in that they have in-water works and no float in their construction schedule. But at the same time there is a security package that is provided by the design-build contractor under which the contractor must pay liquidated damages if the project is not completed on time. Those liquidated damages are also backed by a letter of credit, so that structure mitigates some construction risk. The PDA has led to significant progress in design compared to other P3s and also given the developer a head start in relation to permitting and identification of utilities, which would typically take place after financial close.”

Bondholders can also draw comfort from the fact that the PABs have an investment-grade credit rating and the project’s six-month DSRA. There is a sizable cushion to absorb cost increases – which are likely in an inflationary environment – as Fitch indicates that when ‘run on the Fitch base case, debt service requirements can be met with an increase of approximately 77% in total costs’.

The PDA remains a remarkable feature of the project and places sponsors several steps ahead of a comparable project procured via a hard bid. There is a debate to be had about whether the lack of competitive bidding delivers the best value for money for the state. But if the PDA model does truly reduce the likelihood of cost overruns and failed projects, it is almost certain to grow in popularity as a more reliable option for P3 procurement.

Major Bridges Package One Project

  • Financial close: December 2022
  • Sponsors: Macquarie and S&B
  • Debt: $1.8 billion
  • Tenor: 40 years
  • Description: Financing for the rehabilitation of six bridges in Pennsylvania
  • Underwriters: Wells Fargo and JP Morgan
  • Sponsors’ financial adviser: Macquarie Capital
  • Grantor financial advisers: KPMG, Bluebird Advisors, and PFM Financial Advisors
  • Sponsors’ legal advisers: Orrick, Herrington & Sutcliffe and Schnader Harrison Segal & Lewis
  • Underwriters’ legal adviser: Mayer Brown
  • Grantor legal adviser: Ballard Spahr
  • Bond counsel: Greenberg Traurig and Turner Law
  • Lenders’ technical adviser: Altus Group
  • EPC contractors: Shikun & Binui – America and FCC Construction