In the waning days of the asset and credit mania, Macquarie and Cintra paid the state of Indiana $3.85 billion upfront for the right to run the Indiana Toll Road for 75 years and collect all of the toll revenues.
The concession company that Macquarie and Cintra created to own the rights to the road then raised debt to finance their upfront payment to the state as well as the capital expenditures they were going to make. As of the end of December 2007, $3.4 billion of that debt was outstanding, although at the time, Macquarie and Cintra had the right to access as much as $4.1 billion in pre-approved borrowing, so more or less may be outstanding now.
Can all of that debt hold up under the credit-bubble assumptions that the concessionaires and their financiers made — and if not, what happens to the road?
The special-purpose concession company that Macquarie and and Cintra set up to manage the road’s finances — Statewide Mobility Partners LLC — hasn’t yet reported 2008 results.
But for 2007, these numbers stand out: interest costs for all of that debt, including some costs that weren’t paid in cash (don’t ask) on the road were $239 million.
In terms of actual money, cash interest costs were $141 million.
Gross tolls and other revenues were $151 million.
That leaves, obviously, $10 million to pay for all operating costs.
But cash operating costs were roughly $40 million.
Indeed, Macquarie and Cintra figure that the road’s total cash losses, even before big investments in equipment, were $32 million.
How likely withered 2008?
The revenue side of the equation — those tolls — was bad.
Traffic on the road plummeted nearly 15 percent during the last six months of last year, due to high gas prices and the fact that people balked at toll increases more than Macquarie and Cintra had thought they would.
Toll revenues for the full year likely were $139 million for 2008, when Macquarie and Cintra had been counting on increases during the first years of their operation of the road. (I have come up with this number based on Macquarie’s daily traffic reports over the past few quarters, and, yes, I did remember to add the Leap Day.)
And $7 million or so may have come in from other sources, for a total of $146 million.
On the operating side, if Macquarie and Cintra brought have operating costs down, say, by cutting “toll collection expenses” in half, it would have saved $7 million or so.
So, generously, maybe cash operating costs before debt service came out to $33 million.
That gives Cintra and Macquarie $113 million left over to pay their cash debt costs without taking another cash operating loss.
Indeed, debt costs may have been lower than the previous year, since the road’s debt is based on a floating interest rate that was lower last year than it was in 2007 (after some turmoil that came with the meltdown of the financial industry).
Then again, debt costs may have held steady or increased, since in previous years, Macquarie and Cintra have tried to hedge their exposure to changing interest rates.
But over the long term, it seems unworkable to expect to pay an effective cash interest rate of 3.3 percent in cash debt costs on $3.4 billion worth of debt, which it would need to do to break even under these operating and toll assumptions. (It does not seem that Macquarie and Cintra are yet paying down principal; they did not pay down any principal between the time they took out the loan in June 2006 until the last day of 2007. But, I don’t know what’s happened since then.)
An eight percent interest rate would be $270 million a year in interest costs alone, dwarfing gross toll collections even if they increased by 80 percent.
Plus, the debt was structured so that its costs increase after the first five years of the loan.
One exit strategy to get out from under this crushing debt burden is cut off. Macquarie and Cintra likely thought that they could refinance this massive debt in a few years, even before it came due, taking out cash from the increasing value of the asset — the road – to make up for any early losses.
But the loan is only good for six more years, anyway.
And by then, the road may be worth far less than the value of the outstanding debt, making refinancing without creditors’ realizing big losses impossible.
Macquarie has already taken some writedowns in the road’s value.
But for an indication of what else may come, consider that the state of Indiana, in its own 2006 analysis, figured that the road was worth only $1.92 billion, just half of what Macquarie and Cintra paid.
Further, the state analysts used a 6 percent “cost of capital” to come up with this estimate, when the likely interest cost to the private sector, in a non-bubble environment, would be much higher, reflecting higher risk, meaning a lower upfront value.
Every assumption that Macquarie, Cintra, and their bankers made in doing this deal — from financing costs to the elasticity of tolls to the future value of the asset to operating costs — has proven to be fragile.
Piling fragile assumption on top of fragile assumption for a 75-year lease period can make a big difference in valuation and, yes, viability of the existing financing.
Losing money to fund debt payments on a road that you might lose anyway in a few years doesn’t seem like a wonderful deal for Macquarie and Cintra.
So what happens in the at least plausible event that the concessionaire company simply can’t repay its debt on current terms? (It may seem rude to ask, but the Indiana press brought the issue up for the first time last week, so PPP watchers aren’t crazy to wonder.)
The lease agreement between Indiana and the Cintra/Macquarie’s company says that “if the concessionaire admits, in writing, … that it is unable to pay its debts as such become due, makes an assignment for the benefit of creditors,” or files for bankruptcy, then such an event would constitute a default.
An uncured default eventually would mean that the right to run the road and the future tolls would revert back to Indiana, along with the upfront billions that the state already made.
However, Macquarie, Cintra and their creditors could cut debt levels down to restore the concessionaire’s ability to “pay its debts as such become due,” “curing” the default during the grace period before the state could take over.
Plus, the agreement also offers foreclosure rights to certain creditors to cure defaults.
Thus, it’s possible that not much would happen at all from Indiana’s perspective.
The creditors, assuming that they could find each other and agree to new terms, would simply restructure the debt down to a workable figure and take a couple of billion dollars’ worth of losses on the old deal (not much, really in today’s world).
The tolls, included scheduled increases, would continue to go to the private operator, whether the existing operator or a new one, and then to pay off the creditors. There would just be less debt to repay.
Whether or not a default or a debt refinancing occurs, the moral of this tale, from the perspective of states hoping to cash in on their own assets to close budget deficits, is that the Indiana Toll Road lease is not a precedent for future windfalls, but a relic of the credit-boom past.
Nobody in their right mind is going to offer a similar windfall to a state or city anytime soon for the chance to collect some tolls in return for operating a road based on very fragile financial and economic assumptions.
And nobody in their right mind would finance such a deal.
That’s not to say that banks won’t take advantage of desperate states and cities trying to sell off valuable assets for upfront cash, as profligate states did with their tobacco-bond money a decade back.
But the difference is that while it may turn out that Indiana got the better end of the deal on its road lease, cities and states are just as likely to sell their assets off too cheaply this time around in their desperate attempts to avoid big budget cuts.