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I77 HOT Lanes Debt Should Be ‘Junk’

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junk bonds(Originally published on May 15…in case you missed this.)

Once again, the I77 HOT lanes project has been in the news and not for good reasons.

This past week, local elected boards one after the other passed resolutions demanding answers to new questions or asking for outright delay prior to financial close of the contract.  On Monday evening, Rep John Bradford posted on Facebook that members of the North Mecklenburg delegation to the General Assembly asked Governor McCrory if it is “possible” to delay and assess other funding options.

All of this activity takes place in the final days of the re-re-rescheduled financial close date now slated for May 27th – an event which gained momentum with the recent approvals of Federal TIFIA loans and State Private Activity Bonds.  As part of the run-up to this event the public is finally getting see what the ratings agencies have to say about the project.

The results explain a lot and leave a lot to be desired at the same time.

Two agencies were required by the State to rate the project’s debt.  One of the big three agencies, Fitch, provided one rating, and a lesser known Canadian firm, DBRS, provided the other.  Those ratings were BBB- from Fitch and BBB from DBRS.

To put it another way, both firms rated the project one ratings step above “junk bond” status on their respective ratings scales.

Think about this for a minute.

A road project this important intends to be built using financing that can barely make investment grade status.  Investment grade status is required for many institutions such as pension funds and large endowments to invest in the bonds.

We can presume the I77 debt barely achieved these ratings because of a number of things that happened along the way to setting them.

• Of the four short-listed companies initially looking at the project, only Cintra submitted a bid – a strong indication the others could not make the numbers work.
• Cintra and NCDOT started with low expectations on bond ratings.  According to an April 2014 report from the State Chief Financial Officer and NCDOT to the General Assembly (a full year before the agencies presented their preliminary ratings), the General Assembly was told that Cintra expected exactly the mediocre ratings they ultimately received.
• The State and Cintra have had to put in more capital than originally planned and reduced the initial request for TIFIA debt.  One can reasonably assume both entities put in just enough capital to get over the hump.
• DBRS specifically sites the “compensation event” clause regarding the addition of new general purpose lanes in the future as a supporting justification for its BBB rating.  This is the issue that has been getting a lot of attention the past two weeks at local town halls because it is now known the State would have to pay penalties to Cintra if they build any more free lanes.
• Both Fitch and DBRS site the “unique” nature of the so-called DRAM facility in the contract with NCDOT.  This chunk of up to $75 million from the State serves as a backstop in early years if toll revenue comes in low.  In fact, Fitch estimates $47 million of this facility will need to be used.

Again, all of these red flags must be ignored, and all of these special provisions must be accepted to support a barely not-junk rating.

However, to the general public the most interesting information revealed in these preliminary ratings documents has to do with proposed toll rates.  From the Fitch press release it says the following:

“The initial proposed tolls in the sponsor case are reasonable for this type of asset (between $0.14/mile and $0.40/mile in 2012$)”.

“Reasonable” is relative to one’s ability to pay, but that works out to $3.84 up to $10.40 one way for a full-length 26-mile ride  – numbers surprisingly close to those presented by NCDOT consultant, Stantec.  When those numbers were made public last year, local officials did backflips trying to debunk and minimize them.

At a meeting arranged by local mayors,  NCDOT, and Cintra, a meeting initially intended to be closed to the public, then Cornelius  Commissioner John Bradford was caught on tape by WCNC saying “there is no one I have spoken to that believes an eleven dollar trip is reasonable in any way.”

In that same meeting  Cornelius Commissioner Dave Gilroy pushed Cintra’s point-man for the project, Javier Tamargo, regarding how high rates could go.  Tamargo’s response?

“Who knows?”

Based on the credit agency reports, somebody definitely knew.  They just didn’t want that somebody to be you.

Multiple attempts to contact Fitch Ratings for more details for this story went unreturned.

This post originally appeared in the Herald Weekly at huntersvilleherald.com

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