TIFIA Rulemaking Support - Public Meeting
April 25, 2006 (1pm - 4pm)
Marriott Financial Center, New York, New York
Jean Banker, Metropolitan Transportation Authority (MTA)
Catherine Corless, Metropolitan Transportation Authority (MTA)
Allison Caruso, Bank of America
Kim Paparello, Bank of America
Raymond DiPrinzio, CIFG Services Inc.
Benjamin Djiounas, JPMorgan
David Earley, PBConsult
Doreen Frasca, Frasca & Associates LLC
Bryan Grote, Mercator Advisors LLC
David Seltzer, Mercator Advisors LLC
Linda Hird, DEPFA Bank
Scott Reisling, DEPFA Bank
Jessica Russo, DEPFA Bank
Victoria Taylor, DEPFA Bank
Michael Uhouse, DEPFA Bank
Stephen Howard, Lehman Brothers
Janet Kavinoky, American Association of State Highway and Transportation Officials (AASHTO)
Dave Klinges, Bear Stearns
Jim Taylor, Bear Stearns
Janet Lee, Public Resources Advisory Group
Young Lee, Orrick Herrington & Sutcliffe
Matt Leus, Goldman Sachs & Co.
Peter Lundström, Skanska
Guy Nagahama, First Albany Capital
Steven Rochlis, Federal Highway Administration, U.S. DOT
Alla Shaw, Federal Highway Administration, U.S. DOT
Michael Schneider, Parsons Brinckerhoff, Inc.
Kimberly Swain, Citigroup Global Markets Inc.
Scott Trommer, Fitch Ratings
Bob Brown, Capital Markets Advisor, TIFIA Credit Program, U.S. DOT
Cheryl Jones, Project Finance Advisor, TIFIA Credit Program, U.S. DOT
Mark Sullivan, Chief of TIFIA Credit Program, U.S. DOT
Emily Earle, ICF International
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 funding request thresholds from $100 million to $50 million. Other statutory provisions changes are very general, and as such, will require policy elaboration by DOT. This is where the DOT welcomes the expertise and input of program constituents. Ultimately, input will help shape the draft final rule.
Bryan Grote, Mercator Advisors LLC, asks whether DOT has given any thought to calculating program participation fees differently, and whether fees are necessary and should be capped.
Mark Sullivan, DOT, responds that processing fees are based on the actual cost of outside legal counsel and financial advisors used by DOT. An averaging algorithm is used only to set the first evaluation fee, currently $30,000, based on the average cost of financial advisors.
Cheryl Jones, DOT, adds that DOT has had internal discussion on project monitoring costs. As TIFIA approaches more difficult and dynamic financing structures, those costs can become considerable. DOT is discussing how to manage those costs going forward.
Janet Kavinoky, AASHTO, asks if DOT uses project monitoring fees to supplement administrative takedown or other federal funding. Cheryl responds that the borrower pays fees for new feasibility studies, which are not covered by administrative takedown. Bryan clarifies that there is a takedown for internal costs, but that the borrower is charged for external costs.
Dave Klinges, Bear Stearns, states that the added financial flexibility of TIFIA project refinancing gives bankers the opportunity to use TIFIA funding further to their advantage. For a public project, DOT could have requirements that new cash flow go towards additional infrastructure improvements. For a private project, TIFIA refunding would be a powerful tool; however, the borrower might simply be interested in returns on equity rather than in providing additional infrastructure. DOT should develop an evaluation standard for both public and private borrowers, making sure that public policy objectives are met for either type of refinancing.
Bryan Grote, Mercator Advisors LLC, states that TIFIA has evolved as a project finance tool, making it important to contemplate newfound project complexities. DOT should look at new infrastructure being enabled as a project, regardless of the obligations that are being refinanced.
Bob Brown, DOT, asks if DOT should narrow the refinancing authority to state that the completion, enhancement or expansion enabled by refinancing must relate to the same project that the refinancing is supporting. Bryan responds that he would favor a broader interpretation. DOT could allow refinancing of Project A if new work on Project B meets the TIFIA standard of completion, enhancement or expansion. Alternatively, DOT could allow refinancing of Project A if this frees revenue to enable projects in the more distant future.
Kimberly Swain, Citigroup, discusses refinancing an entire system, but only expanding capacity for one road within that system. If an issuer is a system, with multiple assets rather than a single asset, then the refinancing should be associated with the entire system. If multi-asset project costs were originally $1 billion, and new construction costs are $200 million, together, this would equal a total project cost of $1.2 billion. TIFIA refunding should be calculated based on 33 percent of that total project cost, rather than being based only on new capacity.
Dave Klinges, Bear Stearns, concurs that the intent of the language is to allow debt refinancing. Calculation of the loan should not be limited to 33 percent of new construction, but to 33 percent of the total transaction - original project cost plus new construction cost. However, DOT should set a loan amount limit because it is trying to balance public benefits with limited resources.
Bryan Grote, Mercator Advisors LLC, suggests DOT focus on whether the new construction meets technical and applicable requirements, and whether it is compelling enough to receive TIFIA refunding, based on statutory selection criteria. If certain business terms are appropriate because of the capital structure, DOT can negotiate a posture relative to other debt and equity investors in the project. Cheryl asks whether a certain amount of TIFIA capacity should be set aside for refinancing. Bryan responds that DOT should prioritize projects that generate the greatest amount of new infrastructure. In years of lesser demand, DOT could consider a refinancing proposal with a compelling story that did not measure up in years of heavier demand.
Scott Trommer, Fitch Ratings, sees TIFIA as a catalyst to facilitate project financing and add to the depth of the market. When refinancing new infrastructure, adding flexibility within debt structures, minimizing default risk and adding certainty to repayment is important. The key is facilitating new infrastructure that also enhances cash flow and improves project stability. Bob asks whether DOT should permit use of TIFIA to bail out investors on a distressed project. Scott responds that ultimately TIFIA support needs to facilitate new infrastructure. If this is tied in with capital market structures to enhance the viability of a project, it is a win-win situation.
Allison Caruso, Bank of America, asks whether private entities are precluded from qualifying for private activity bonds, as an entity must receive Title 23 funds to apply. Cheryl responds that this does not preclude private entities from qualifying; in fact, it is Title 23 assistance and could even be a TIFIA loan. Allison asks if any corporations are receiving Title 23 assistance.
Steven Rochlis, DOT, responds that most grants are made to the state as grantee, and then the state chooses sub-grantees. These sub-grantees may be private entities, depending on state laws.
Michael Schneider, Parsons Brinckerhoff, Inc., asks what kinds of criteria DOT will consider when awarding private activity bonds. Cheryl responds that DOT is interested in keeping the selection criteria as broad and as open as possible, in order to encourage applications. Mark adds that DOT does have the flexibility to reconsider criteria based on experience. One central factor considered is project readiness.
Kimberly Swain, Citigroup, asks whether a borrower could enter into a secured loan agreement today, but not effectuate the agreement until one year after substantial completion of the project.
Stephen Howard, Lehman Brothers, describes that in the real estate market, lenders set up and pre-commit takeout financing subject to meeting certain criteria at construction completion. DOT could set up a similar program as part of capital markets takeout financing.
Cheryl Jones, DOT, asks whether the pre-commitment should go out as far as eight years or more, in cases where the construction period will last that long.
Dave Klinges, Bear Stearns, states that the cost to the government of funding a TIFIA loan now is different than funding it eight or ten years in the future. Current loans and forward commitments should be treated differently. This could be priced out through models allowing the government to charge the borrower the market value of forward commitments.
Janet Kavinoky, AASHTO, states that the term project is used frequently, both in the current discussion and throughout TIFIA guidance. DOT should define the term project with its counterparts, such as project sponsors. Cheryl and Mark both respond that the project is defined carefully during project negotiation.
Dave Klinges, Bear Sterns, suggests that "project" be defined as within the boundaries of the existing project, contiguous to the existing project, or proximate enough to the existing project to reasonably expect increased use of the project as originally defined.
Raymond DiPrinzio, CIFG Services Inc., discusses additional funding capacity. Under senior debt indenture, more capacity is freed up for senior debt. In a distress situation, a rating agency may or may not agree that a dollar of senior debt funded by TIFIA sub-debt equals a dollar of additional capacity. However, by making that capacity available, TIFIA lets the market decide.
Jean Banker, MTA, states that a project would not apply for TIFIA if the loan did not provide additional funding capacity (or a similar benefit), so there may be no need to define it.
Scott Trommer, Fitch Ratings, suggests identifying criteria for providing additional funding capacity. Using TIFIA in a distress situation relieves pressure on the senior debt by substituting subordinate debt, and the availability of TIFIA provides the capacity to build new infrastructure. Fitch Ratings would evaluate this based on how the loan relieves pressure on senior debt, minimizes or limits default probability, and affects the repayment terms of senior and sub-debt. There must be significant latitude in defining criteria for additional funding capacity.
Bryan Grote, Mercator Advisors LLC, states that for a refunding proposal, the project sponsor should be asked to provide their assessment of the financial benefit being derived. DOT and its financial advisors can look at this assessment as part of the evaluation process.
Dave Klinges, Bear Stearns, states that additional funding capacity for enhancement does not limit itself to revenue-creating enhancements. DOT should anticipate loan applications that do not necessarily create new revenue streams, and this may lead to applications for worthy projects that would not have been submitted otherwise.
Peter Lundström, Skanska, states that in some greenfield projects, the sponsor might decide not to rate the project during the construction and ramp-up phases. Refinancing might be needed when a rating of the greenfield from the beginning of the project is not possible. Bob responds that in original statute, TIFIA can refinance construction financing within one year after the project is finished. Peter points out that in Europe, investment banks have 2 ¼ years after project completion to invest, and that one year is not enough time to develop a track record for a rating. One solution would be a TIFIA commitment conditioned upon the eventual credit rating.
Cheryl Jones, DOT, states that in the statute, refinancing is applicable to long-term obligations, and asks how DOT should define long-term obligations. Bob adds that this is complicated because much project debt is bank debt and does not have specific maturity like bond debt.
David Seltzer, Mercator Advisors LLC, asks whether, in a bank debt financial model, DOT sees the benefit of allowing a project that is not presently investment grade to send in a letter of interest to TIFIA. This would signal that after ramp-up and construction, the project would able to refinance bank project debt with a TIFIA loan if the project becomes investment grade. This would be a valuable application of the TIFIA program, as it would encourage bank lenders to come in, knowing that when the project becomes investment grade, TIFIA and capital markets senior grade loans could be there to provide long-term financing.
Bob Brown, DOT, asks how to meet the statutory test that this application would cover long-term financing obligations, when the bank debt would not be considered permanent financing. David suggests that anything greater than a one-year term should be considered a long-term liability, satisfying the statutory requirement.
Mark Sullivan, DOT, adds that one pragmatic consideration would be the degree of federalization for the project. Conditional commitment would mean that the project sponsor agrees to follow federal guidelines for construction.
Bryan Grote, Mercator Advisors LLC, suggests creating a conditional term-sheet, rather than a letter of interest. This would be a more formal commitment, not take budget authority space, and would demonstrate forethought on behalf of the project sponsors.
David Seltzer, Mercator Advisors LLC, responds that this would work only if there was not a pre-condition that an investment grade opinion letter be received, as the project might need two to three years to become investment grade. Mark asks whether TIFIA would close before there is an investment grade rating. David responds that there would be a conditional term-sheet as suggested in the rule, rather than a closing.
Stephen Howard, Lehman Brothers, states that TIFIA can be one element of a long-term takeout. The long-term deal could be sketched out in a variety of term sheets, but these would need to cover both bonds and TIFIA funding. Cheryl describes the Special Experimental Project 15 (SEP-15) in Texas. DOT is discussing conditional commitment subject to receiving a rating, as TIFIA would be committing to the project before the Texas DOT chooses the concessionaire. The final project structure and rating is not known at the time DOT makes its commitment.
Benjamin Djiounas, JPMorgan, asks whether there may be any complications with DOT pre-approving a project for TIFIA, and having a private developer come in and negotiate the terms.
Mark Sullivan, DOT, elaborates on the agreement DOT is entering into with Texas. To advance the private concession model, DOT will modify the typical loan application process for three projects selected by Texas. DOT provides conditional approval for the concessionaires bidding for final concessions, with plans to develop rules that could apply to similar situations.
David Seltzer, Mercator Advisors LLC, asks whether there are differing views on the priority of funds for projects with concessions or other private equity investment vis-a-vis distribution of cash flows to a TIFIA loan and whether this would be covered in a rulemaking.
Jim Taylor, Bear Stearns, states that although DOT has invited project sponsors to come forward with a variety of project ideas, there are few written guidelines on the types of projects that DOT would not approve. DOT can use the rulemaking to define eligibility. With refinancing, DOT should set up guidelines for projects that would not be considered and then leave the door open for all other proposals. Policy will be established on a case-by-case basis, which is preferable.
Bob Brown, DOT, asks how DOT should handle acquisition financing, using the Chicago Skyway acquisition as an example that provided new money financing as part of a refinancing. What is the total financing transaction in an acquisition and can it be part of a TIFIA deal?
Stephen Howard, Lehman Brothers, states that use of acquisition proceeds might be a determining factor. If a TIFIA loan supports an acquisition and the proceeds are used for expansion of transportation infrastructure, one could argue in favor of refinancing.
Raymond DiPrinzio, CIFG Services Inc., states that, looking into the details of the Skyway financing, dollars go towards enhancement of an existing facility. DOT will likely receive proposals where the project sponsor is paying $2 billion for the acquisition, and putting in $400 million of upfront capital expenditures
Bryan Grote, Mercator Advisors LLC, reiterates that whatever type of financing or refinancing is at stake, DOT must look at the infrastructure enabled. More specifically, there is a precedent where DOT negotiates and looks at each deal on its own merits and determines the appropriate posture for TIFIA. DOT would have that same flexibility in a refinancing, whether acquisition financing or not. There is a long-standing history with federal aid revenue backed projects specifying in the toll agreement - or TIFIA credit agreement - how the revenues are applied.
David Seltzer, Mercator Advisors LLC, asks whether TIFIA financing should be used for up to 33 percent of a refunding or acquisition financing, provided that an amount equal to 100 percent of the TIFIA proceeds are used for Title 23 or Title 49 new transportation projects.
Kimberly Swain, Citigroup, suggests that TIFIA refunding be enabled when a project has new capacity. The refinancing should not be limited to the new improvement, but should include all debt or project costs. If the sponsor wants to refinance prior debt, the sponsor should be able to take prior costs into account when determining TIFIA capacity. Bob asks if TIFIA funding should cover a $1 billion project, if half the original costs have amortized. Kimberly suggests using the unamortized costs plus the new cost of the facility to determine TIFIA capacity.
Bryan Grote, Mercator Advisors LLC, asks if DOT has a rulemaking timeframe. Bob responds that some initial drafting has been done. DOT will publish a notice of proposed rulemaking (NPRM), with a typical 60-day comment period, analysis of public comments, and then drafting of the final rule (with review by OMB). DOT hopes the NPRM will be done this summer.
Mark Sullivan, DOT, describes two possible changes. One would be the application of the eight criteria listed in the original rule, as there is a tremendous amount of TIFIA resources available and the criteria have not been used to pick one project over another. DOT is looking at two points of obligation as well, at the time the term sheet is made and then at the time of agreement.
Bryan Grote, Mercator Advisors LLC, responds that DOT should keep the two-phase obligation process as it provides useful flexibility to obligate via a term sheet. Mark clarifies that DOT would still issue term sheets, but also would look at an option that falls slightly short of the obligation phase.
Bryan Grote, Mercator Advisors LLC, asks how DOT would handle a refinancing proposal in the near term, and suggests looking at a refinancing proposal as a SEP-15 proposal if necessary.
Steve Rochlis, DOT, responds that there was substantial debate on proceeding with refinancing while in the process of issuing the rule, even with broad statutory authority. He agrees that SEP-15 would provide another avenue to advance projects in an experimental format.
Mark Sullivan, DOT, thanks the participants and the meeting is adjourned.