Friday, October 10, 2008

"The financial system of the future will be less tolerant of the super-leveraged deals that have dominated discussions of private toll roads ..."

Credit worries affecting both public and private efforts to build roads, bridges


Michael Lindenberger
The Dallas Morning News
Copyright 2008

How badly is the Wall Street implosion affecting cities and states -- and, say, toll road authorities? Pretty badly, if they are trying to borrow money right now.

That's the word from Ken Orski, editor and publisher of Innovation Briefs a must-read transportation newsletter that often touts the benefits of private investment in infrastructure but does so with fairness and rigor.

On Thursday, he wrote to recap a meeting of transportation officials in New York that included remarks by top bankers.

A sober assessment of the present state of the financial markets was offered by a senior Wall Street executive highly knowledgeable in transportation financing. The full spectrum of debt-funded infrastructure funding alternatives is under pressure, he reported. Most states are in a massive budget review as the impact of reduced revenues is beginning to emerge. Credit spreads have widened significantly and the overall borrowing costs, including Private Activity Bonds, have increased appreciably. There has been a record postponement of new bond issuances and a cancellation of at least one proposed PPP deal.

The debt market is already affecting Texas transportation agencies.

NTTA is looking to convert the final piece of the short-term debt it acquired to buy the State Highway 121 contract in the next month or so -- and so far the prospects for doing so cheaply are dim. TxDOT, which has some $500 million in variable-rate financing, has seen its rates go through the roof.

But what is most interesting about Orski's comments is his report that private firms, too, are feeling the pinch.

The PPP project he alludes to is in St. Louis, where Missouri officials have decided to scrap plans to use private funds to repair or replace some 802 bridges. The culprit? Credit worries over the past year that made "private financing" too expensive, the state said.

When the state introduced the plan two years ago, it was offered as a new model for states wanting to repair or replace hundreds of decaying bridges without issuing more bonds. The approach had gained national attention following the Minneapolis bridge collapse last year.

Now, the state will go forward with the project, but pay for it the old-fashioned way: Issue bonds and pay back the debt over time.

Looking to the future, the Wall Street executive saw a changing capital market, with more costly municipal financing and severely constrained bank financing driving down valuations and reducing the number and size of projects.(However, in a follow-on discussion, the executive saw a ray of hope--several municipal bond deals totalling in excess of one billion dollars have come to market in the last few days, albeit at elevated interest rate yields).

That's an interesting perspective, for a bunch of reasons. For one, private firms looking to invest in Texas infrastructure have maintained throughout the credit market turmoil that the credit worries have reduced neither their appetite nor their capacity to pay big dollars for toll roads.

The U.S. Secretary of Transportation has argued for years that private firms have some $400 billion in capital worldwide, ready to invest in toll roads and other projects.

But if that number is fast shrinking, or if the firms with the money begin to favor other markets in Europe, that leaves the American tax payer with the full bill for improving the system. That suits some just fine, but most parties -- including Speaker of the House Nancy Pelosi and Rep. Eddie Bernice Johnson of Dallas -- have come around and now say private capital is an essential part of the mix for building the roads, bridges and other transportation assets the nation so badly needs. They argue that it's a matter of degree.

For his part, Mr. Orski sees the problems on Wall Street as temporary, especially considering how long a project it will be to truly rebuild our infrastructure. But the financial system of the future, he predicts, will be less tolerant of the super-leveraged deals that have dominated discussion of private toll roads in America. Instead, the upfront payments will be smaller and states will insist on greater controls.

That should be good news for those who distrust the private sector's involvement in public infrastructure. But he worries that the companies will simply take their money to other countries in Europe and elsewhere where the idea of privatized roads and bridges has deeper roots.

© 2008 The Dallas Morning News:

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