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Background Reference

Transportation Infrastructure Finance and Innovation Act (TIFIA)

TIFIA Rulemaking Support - Public Meeting
April 21, 2006 (9am-12pm)
Omni San Francisco Hotel, California

Meeting Attendees

  • Barney Allison, Nossaman Guthner

  • Kurt Forsgren, Standard and Poor's

  • Kurt Krauss, PB Consult

  • Sara Lee, Goldman Sachs

  • Rich Saskal, The Bond Buyer

  • Lisa Siemson, Causeway Financial Consulting, Advisor to Transbay Joint Authority

Moderators

  • Bob Brown, TIFIA Credit Program, DOT

  • Duane Callender, TIFIA Credit Program, DOT

  • Mark Sullivan, Chief of TIFIA Credit Program, DOT

Meeting Support and Minutes

Lisa McNally, ICF International

TIFIA Presentation Summary

Bob Brown, Department of Transportation (DOT), opened the meeting with a PowerPoint presentation, providing an overview of how the DOT is approaching the Transportation Infrastructure Finance and Innovation Act (TIFIA) rulemaking process. The existing rule has been in place since 2000. The current rule needs to be amended because of the recently passed Safe, Accountable, Flexible, Efficient, Transportation Equity Act - A Legacy for Users (SAFETEA-LU). Some changes required will be ministerial, such as changing project size thresholds from $100 million to $50 million. Other changes require statutory provisions that are very general, and as such, will require policy elaboration by DOT. This is where the DOT welcomes the expertise of and input from program constituents. Ultimately, input will help shape the draft final rule.

STIP Requirements and Project Refinancing

Kurt Forsgren, Standard and Poor's
Kurt's question relates to the refinancing of prior TIFIA obligations, and the ambiguity of language relating to assets as being a part of an acquisition, and whether TIFIA should or could be applied to those assets. Kurt's thought is that most of the projects receiving funding assistance would be expansion projects, not new projects. Would those expansion projects be part of a State Transportation Improvement Plan (STIP) already, if they were to be acquired via long-term concession? And, if the projects were to be part of a 75-year concession, would those expansion projects necessarily be part of a state-wide STIP? If so, this might make them ineligible for TIFIA assistance.

Mark Sullivan, DOT
Mark responds that this is an interesting thought. A project is to conform to the regular federal planning and programming regulations in order to ensure that these projects have public sponsorship and are consistent with the direction of a state or region. DOT wants to make sure that they are not dealing with and supporting rogue projects. The process of a project getting into a STIP is often a ministerial action. Often you'll see that a project can be amended onto an existing STIP, thereby meeting those requirements. The new TIFIA statute language (SAFETEA-LU amendments) replaces the specific requirement of a project needing to be on a STIP, with a more general conforming statement for planning requirements.

Kurt Forsgren, Standard and Poor's
Kurt suggests three main reasons for why you would be refinancing something:

  • To make project more affordable (reduce interest costs);

  • To buy time in the event that the project was underperforming;

  • As a method for doing project expansion.

Kurt states that it would be hard to quantify how TIFIA should be applied to various refinancing scenarios because one or all may apply. It makes sense to have TIFIA be as flexible as possible because of these different scenarios. Again, it may be hard to quantify what those scenarios are, but in those instances where a project is underperforming, for example, DOT will need to be discretionary in its funding in order to help a project grow and meet its forecast. Maybe allow the 33 percent apply to a project if the project is one requiring normal refinancing (in order to do an additional project, versus expansion of existing project) to get it at functioning capacity.

Mark Sullivan, DOT
The statute is clear that TIFIA refinancing needs to be tied to expansion or completion or enhancement of a project. But what Kurt Forsgren is suggesting is that if the original project is under financial stress, DOT should look to work the 33 percent so that it applies to more. That is, so that DOT provide support for 33 percent of an entire refinanced package versus 33 percent of the proposed new project.

Kurt Krauss, PB Consult
Kurt Krauss asks whether the rule language strictly refers to refinancing project debt, or if it one could look to programmatic instruments in that by refinancing, you have freed up additional capital that you could apply to projects that would be eligible for funding assistance if the project already was on your STIP.

Mark Sullivan, DOT
Kurt's question touches on an issue DOT has encountered since the beginning of the TIFIA program, which is being able to define what a project is. For example, the DOT has funded the Miami Inter-modal Center and has considered that a project. The components show it is a program of individual projects that is being advanced to improve access to the Miami airport. Even though funding went towards a rental car garage, highway improvements, and new transit center, the fact that all those were reviewed and approved under one environmental review was very helpful; it provided a good policy direction to say that it was one project. When you look at a State DOT that is trying to advance a program of activities, TIFIA would be very useful in helping to refinance a portion of that program. However, Mark doesn't believe the DOT has a clear authority in the existing statute to take that perspective as a matter of course. Mark says it is not clear that the refinancing refers to the project itself that will be completed, enhanced or expanded, or if it refers to an entirely different project. There's nothing in the language that says you need to refinance the project that you are expanding. It could be that you are refinancing another project in order to enhance, complete, expand the new project. The nebulous language helps to provide more of a program focus. Mark sees this as a liberal interpretation, but he believes it works with the language. Those long-term project obligations do not need to be for a TIFIA project (or another project that might have qualified for TIFIA); they can be simply obligations.

Substantial Completion

Barney Allison, Nossaman Guthner
Barney proposes a question relating to the definition of substantial completion. It is important to define substantial completion in the context of "completion, enhancement, and expansion" of a project because this definition will affect how DOT establishes re-payment schedules, maturity date and commencement for repayment. Barney suggests that in the revised rule, DOT will need to refer to a new project when defining "substantial completion," because one could be looking at an existing asset that has been in place for 20 years, for example, and currently is being refinanced for having its capacity expanded. However, DOT would not want to limit the repayment period to the substantial completion of the original project. The purpose of TIFIA is to help to fill gaps. If it takes a billion dollars and $100 million new money to expand the project, then TIFIA should provide 33 percent of one billion dollars to do that.

Bob Brown, DOT, requests clarification on whether this view does not require connections between size of new money investment and the size of the new refinancing under this statute? Barney replies that the statute does not address this policy issue. The statute will let you do $1 of "project completion, enhancement, and expansion," as long as you are within budget authorization. Barney responds by stating that the DOT will create a policy concern if a project sponsor were to request one billion dollars for refinancing $1 worth of new money. Barney suggests that a way around this is to not write the rule, and then tell project proponents that the policy prevents them from doing this when necessary.

Mark Sullivan, DOT
The rule making process is tedious, but the rule has the same force of law as the statute. If you say no to someone, the law requires you to lay out clearly what the rules are, so it is not an arbitrary decision. You need backup in the language. So, we do need to produce a rule that does address the issue of proportionality; what is the proportion of what is being refinanced relative to the new investment.

DOT has a $50 million statutory minimum for TIFIA projects. For the completion, enhancement, or expansion of a project, the obvious option is to say that this new project needs to be at least $50 million dollars. But, this still leaves the question of how much DOT is willing to participate in a refinancing in order to get a project of that size. DOT needs to consider whether it can have $2 billion in TIFIA debt in refinancing if it produces just one $50 million project. Again, there is nothing in the language that says that completion, expansion or enhancement has to be any particular size. The statute on refinancing does not really say if it has to be a $50 million project to be eligible for refinancing. This is an issue of whether DOT should rule out leveraging the $1 new money projects into those billion dollar refinancings.

Kurt Forsgren, Standard and Poor's
Does the 33 percent apply just to the amount of money in the new project, or to the total amount of money in the total transaction? Kurt advocates for more liberal interpretation of what the 33 percent is based on. He suggests that one approach may be to not have a limit on the refinancing aspect if the DOT felt that the new project was enhancing existing project.

Mark Sullivan, DOT
In effect, if the projects are not connected, then the project is considered as if it were a new project which TIFIA can fund at 33 percent, rather than the funding going toward new debt for the project. DOT could then allow TIFIA funding to go somewhere else in an organization's financial structure where it might have more benefit in order to support the new project.

Lisa Siemson, Causeway Financial Consulting, provides a hypothetical scenario in which the Transit Authority has a project that because of existing debt, would need to be retired over 10 years. This project has the opportunity to get TIFIA support, which would free up capacity for new debt. Lisa suggests that DOT doesn't look at 33 percent of refunding obligation, but instead looks to how much new capacity is created to complete the expansion.

Mark Sullivan, DOT
With transit systems, the program definition or approach is easier. Mark believes that highway and transit programs are similar. For example, it is the practice of FTA to see transit systems as a single project. Lisa's example suggests that TIFIA would be calculating the savings, or creating capacity for new debt.

A central question is whether a project sponsor can demonstrate the savings and whether they are pledging to use savings to build a project in the near future, or does DOT prefer to see that the sponsor has a complete project plan and that the new project can get started once refinancing closes. Lisa would think that you would want transit operator to use debt capacity to finance future expansion. Lisa asserts that the DOT is not in the business to do refinancing for transit agencies. Rather, DOT is in the business to help them complete projects. Mark says that one way to ensure that this condition is carried out is that DOT waits to close until the project is ready to go.

Opinion Rating and Recovery Analysis

Mark assumes that refinancing implies that one is taking the very same revenue stream, and questions whether there are scenarios where one is introducing a different revenue stream to pledge to TIFIA.

Kurt Forsgren, Standard and Poor's, responds that the issue could be more that the expansion project may not create new revenues, or that it creates entirely new revenues. Therefore, the rating letter that DOT requests from sponsors should relate to the revenue that is being pledged. Kurt suggests that sponsors get a rating letter based on the refunded piece, which includes new money for new project.

Some of the projects applying for TIFIA may have payment mechanisms that are unrelated to the project, such as shadow tolls. Kurt asks whether there is an interest to look at the rating letter to see what it means in situations where the payment mechanism is not related to a project per se, but of some other payment mechanism that may be associated with the project. Some of these shadow payment structures are related to how well the project does, or related to how well the operator is doing the job. Kurt asked if DOT views rating letter as providing comfort in situations where payment mechanism may be some other activity-based revenue stream.

Standard and Poor's applies recovery analysis to projects when they look at capital charges for bond insurers. There is value added in knowing what recovery aspects are to a project in addition to whether the project is investment grade. From the TIFIA standpoint, a project will have uncertainties especially if it is a greenfield with no historical data to evaluate revenues. It may not be investment grade because it is a greenfield, but it may show strong ability to recover certain percentage of initial debt. This is something that will add value to recovery aspects of those projects which could give a better sense of how a project will perform over time.

Mark asks if Standard and Poor's ratings are based on pure risk, or if they incorporate assumptions regarding recovery. Standard and Poor's uses a separate scale to look at recovery aspects of projects. These aspects are not incorporated into general project ratings. That rating is purely focused on time of payment and paying in full. The separate scale that looks at recovery could be requested and provided for projects. From the TIFIA standpoint, it makes a lot of sense to include this because DOT is interested in how the project performs over time as much as whether it pays on time.

Mark Sullivan, DOT
The DOT's focus was initially to get investment grade ratings on senior debt. DOT had an elaborate process for extrapolating the rating on TIFIA debt which would be used for purposes of capital allocation and setting aside enough money in the budget. DOT has recently come to ask rating agencies to grade TIFIA debt, too. This has helped DOT improve the link between rating and capital allocations. This is something, therefore, that DOT will make explicit in their regulation that the rating letters include rating on TIFIA debt. It does not mean that TIFIA debt will need to be investment grade (but, the senior debt does need to be investment grade). This mechanism is further aligned with the desire to ensure that senior rating has a relevance to the TIFIA finding. In other words, the amount of senior debt needs to be as big as the TIFIA debt. Mark believes this will improve the overall process, and allow for clear information from rating agencies that they can apply to DOT risk models.

SEP-15 Issues and Concessions

Barney Allison, Nossaman Guthner
Barney Allison asks if there is any chance of including in the rule the TXDOT SEP-15 changes to better mirror the competitive procurements that are being seen across the country.

Barney Allison also points out (in follow-up email correspondence with DOT on April 27, 2006) that in addition to revising the TIFIA rules to implement SAFETEA-LU changes, DOT is considering adoption of new rules to better reflect how the TIFIA application and commitment process has evolved since the rules were first adopted. Barney suggests incorporating the deviations approved in the TxDOT SEP-15 to streamline the process in a competitive procurement situation. In particular, Section 5.3 of the EDA approves a variation from the requirement of a preliminary rating opinion letter regarding the senior debt obligations at the time of submission of the application by TxDOT which is found at 49 CFR 80.11(a) and 80.15(b). If there is interest amongst DOT for doing this, Barney offers his assistance.

Mark Sullivan, DOT
The DOT is looking more at projects where it can adopt the European private concession model and offer a project to several competing private firms. A question for the TIFIA office is if it will continue to accept applications from several firms competing for one project, which is how it is now handled. Alternatively, the DOT could modify the process to work with a state and make the process more efficient for everyone. The modifications the DOT is doing with Texas would allow the DOT to accept an application from a state initially, and qualify the project for TIFIA assistance. Then, the DOT would allow the state to solicit among the competing firms, with each firm having the assurance that it would have access to TIFIA funds if it wanted them. Once the winning firm is selected, there would be final negotiations with the TIFIA office. The DOT needs to make this explicit in program guidance. If there is something in the rule now that is a barrier to this goal, they need to identify it.

Mark suggests that the requirement for a preliminary rating letter may need to be altered. The rating opinion letter is something that is received after an application is received from the state. The change might require each of the competing firms to submit to the state its own rating opinion letter based on that firm's particular plan.

Obligating Funds and Funding Commitment

Mark Sullivan, DOT
Mark asked the meeting attendees to consider an issue that is not related to SAFETEA-LU amendments. The issue is when TIFIA commits funding, there is a point when the credit council recommends a project to the Secretary, and after the Secretary gives approval, DOT issues a term sheet to the project. The current rule states that when the term sheet is issued, this is when DOT "obligates" funds to the project. This term, "obligate funds," has a specific definition in federal budget lingo. When funds are obligated, DOT sets aside funds for a project, and DOT is committed to completing the agreement.

However, there is discussion of having a conditional term sheet that can be a self-executing document once a project meets any condition (such as completion of the NEPA process). The current process for obligating funds is awkward for DOT in an administrative sense because DOT is working only with preliminary data and therefore does not have a strong indication of whether something is in a higher- or lower- end category in the capital allocation process. Mark proposes moving the point when funds are obligated to a stage where DOT only obligates funds once at an "execution phase." DOT still reserves funds in the budget, and still issues a term sheet. Mark wants to move to a single obligation and redefine the term sheet as the point at which DOT makes a commitment to the project. At the same time, he recognizes that some sponsors want to know that they have obligated funds for fear that those funds could be lost if not obligated.

Kurt Forsgren, Standard and Poor's, supports Marks proposition.

Lisa Siemson, Causeway Financial Consulting, brings up the issue that for transit operators to be able to award any construction contracts, they would need to have full funding plan in place with commitment from all funding sponsors. Bob Brown responds that while TIFIA may be the first money drawn for a project, DOT likes to see a full plan of finance locked down so that DOT can have a good idea that the project can get finished before it signs a TIFIA agreement. Mark adds that there has to be an entity that is committed to paying any overruns. And, a sponsor still needs an executed loan agreement with DOT before they can start solicitation.

Mark Sullivan, DOT, closes the meeting, and thanks everyone for their input.