P3 Financing. Barney Allison. Peter Luchetti. Alfonso Mendez. Partner, Nossaman LLP. Managing Partner, Table Rock Capital

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1 P3 Financing Barney Allison Partner, Nossaman LLP Peter Luchetti Managing Partner, Table Rock Capital Alfonso Mendez Senior Financial Advisor, Arup

2 Typical P3 Financing Structure Project Company SPV

3 P3 Financing Options Private Taxable Debt (bank debt, subordinate debt) Private Activity Bonds (PABs) Governmental Tax-Exempt Bonds Private equity Federal financing programs (TIFIA, RRIF, WIFIA) Federal grant programs Public contributions

4 Private Taxable Debt Senior Bank Debt, Taxable Project Bonds Useful for projects that are not eligible for tax-exempt financing Most P3 projects utilize some element of capital markets debt Shorter tenors Subordinate Bank Debt Project Examples I-4 Ultimate, Long Beach Courthouse, UC Merced, U.S. 36 Managed Lanes, I-595 (original financing)

5 Private Activity Bonds Eligible for certain types of assets Requirements Exempt Facility Bond under Section 142 of the Code Volume cap allocation Subject to Alternative Minimum Tax (AMT) Project Examples I-95 HOT Lanes, Purple Line Light Rail, Pennsylvania Rapid Bridge Replacement Project, Portsmouth Bypass, SH 288 Toll Lanes

6 Governmental Tax-Exempt Bonds Under certain structures, projects can use governmental, tax-exempt bonds Requirements Governmental ownership and issuer No volume cap allocation Not subject to AMT Project Examples Allentown Water/Sewer, Harrisburg Parking

7 Federal Financing Programs Transportation Infrastructure Finance and Innovation Act (TIFIA) Administered through the Federal Highway Administration (FHWA) Direct loans, loan guarantees, and standby lines of credit Funding levels ($275M (2016, 2017), $285M (2018), $300M (2019, 2020) Eligible Projects - Highway, transit, passenger rail, certain freight facilities, certain port facilities, surface transportation facilities at airports, and rural infrastructure projects Requirements limited to 33% of project costs (49% under certain circumstances); two investment grade ratings; dedicated repayment source; interest rate equal to the SLGS rate plus one basis point Project Examples Denver Union Station, Purple Line, Portsmouth Bypass, SH 288 Toll Lanes, I-595

8 Federal Financing Programs Railroad Rehabilitation & Improvement Financing (RRIF) Administered through the Federal Railroad Administration (FRA) Direct loans and loan guarantees to finance development of railroad infrastructure Eligible Projects - intermodal or rail equipment or facilities, including track, components of track, bridges, yards, buildings and shops Direct loans can fund up to 100% of a railroad project Project Examples Denver Union Station, Amtrak Water Infrastructure Finance and Innovation Act (WIFIA)

9 Public Contributions Upfront capital contribution Milestone payments Tax credits

10 Capital Stack & Cost of Capital Sponsor Equity Preferred Equity Mezzanine Debt Junior Debt Sponsor Equity Investment Grade Debt Senior Debt

11 Debt Investors Low risk tolerance Fixed returns Demands collateral security 1 st priority of payment Focus on Loan-to-Cost and Debt Service Coverage Least expensive form of capital

12 Equity Investors Higher risk tolerance Variable returns Unsecured Last priority of payment Focus on Internal Rate of Return and Return on Equity Most expensive form of capital

13 Risk & Repayment Order FIRST REPAYMENT ORDER LAST SENIOR DEBT JUNIOR DEBT MEZZ DEBT PREFD EQUITY SPONSOR EQUITY LOW RISK OF INVESTMENT HIGH

14 Risk vs. Return Private Sector Transaction Public Sector Transaction Public-Private Risk Sharing Expected Rate of Return Spread Tax- Exempt Debt Taxable Debt Tax Equity Project Equity 100% Recourse to Government Risk to Investor

15 Efficient Capital Structure Maximize the financing term Minimize the interest rate / cost of capital Minimize the DSCR requirement

16 Tax-Exempt vs. Taxable Debt Tax-Exempt Public Sector Transaction Retail investor driven investment product Requires traditional credit/revenue streams Generally must obtain a published credit rating Fundamentals allow for 100% leverage and/or public entity can contribute cash equity Public ownership is preferred/necessary Debt Capacity may be an issue Public Offering costs of issuance Restrictions on amount of performance-based risk transfer Taxable Debt Private Sector Transaction Multiple institutional investor types/classes to access Accommodates a diverse credit/revenue streams A published credit rating not required Maximum leverage is credit/structure driven Private ownership is typical Private Placement/Loan costs of issuance

17 Project Risks / Mitigants RISK Completion Risk MITIGATION Net Worth / LOC / P&P Bonds Operating Risk Long Term Contracts / Covenants / Private Capital-at-risk Demand Risk Lease Agreements / Strong User Fees Force Majeure Risk Political Risk Refinancing Risk Liquidity Risk Interest Rate Risk Casualty Insurance Historical Track Record Make Whole Premium Standard Documentation Hedges / Rate Locks

18 Financing Hurdles Portfolio Related Issues Attractive Alternative Investments Inability to Analyze and Structure Projects Lack of Asset Class for Benchmarking Lack of Designated Pool of Capital Variable Appetite for Construction Risks Currency Constraints Ratings Hurdle

19 Private Placement Update Traditional USPP Market 2016 H1 ($mm) 2015 ($mm) 2014 ($mm) 2013 ($mm) Total Volume 28, , , , Agented Domestic 14, , , , Agented Cross- Border 11, , , , Canadian Issuers , , , Australia/NZ Issuers 2, , , , UK Issuers 4, , , , NAIC-1 9, , , , NAIC-2 18, , , , SOURCE: PPM DataField

20 Case Study: Long Beach Civic Center + Port + Library + Park + Mixed Use The $513 million financing package arranged by Plenary (developer) and HSBC (banker) consists of: $239 million approximately 43-year-term private placement with Allianz $213 million approximately three-year-term construction loan from Sumitomo Mitsui Banking Corporation $21 million equity investment by Plenary Contributions of cash and land from the City of Long Beach totaling approximately $40 million in value

21 Case Study: Midwest Water Treatment Plant (WTP) 75-year-old WTP in need of immediate replacement at a cost of $350 MM 120 MGD WTP serving 675,000 population Available Debt Instruments and Funding Mechanisms Municipal revenue bonds Municipal subordinate bonds Private Activity AMT bonds Private subordinate liens WIFIA Equity Preferred capital structure depends on the method of procurement selected to build the project

22 Case Study: Midwest Water Treatment Plant Alternate methods of procurement considered: Design Bid Build Design Build Design Build Finance Operate & Maintain Value for Money Analysis (VfM) Capital cost certainty Cost of borrowing uncertainties Operating risk Maintenance risk Variable demand risk Security risk Technology risk Credit reduction risk Existing facility failure prior to completion of new facility Political and economic risk

23 Case Study: Midwest Water Treatment Plant Two financing cases are being actively considered: PABs, 4.2 Private Placement PABs, 4.2 Private Placement with WIFIA WIFIA is a new program and timing and availability is uncertain $1,100,000,000 PV of Delivery Alternatives $1,050,000,000 [CELLREF] $1,000,000,000 $950,000,000 $900,000,000 $850,000,000 $889,953,502 [CELLREF] $872,334,120 $800,000,000 $750,000,000 DB P3

24 Typical P3 Financing Structure Project Company SPV