Irvine Corona Expressway Project Financing Review Sperry June 4, 2010 1
The Proposed Irvine Corona Expressway (ICE) Project Project screening is key aspect of pre-development discussions Environmental and final design is targeted to begin in fiscal year (FY) 2012 and continue through FY 2028 Construction is targeted to begin in FY 2018 and continue through FY 2029 Project operations and tolling are assumed to begin in 2030 Sperry 2
Non-Recourse Financing This analysis assumes the ICE Project s $301.6 million pre-development costs from FY 2012 through FY 2018 will be paid with equity contributions. This analysis assumes that the ICE Project construction cost will be financed with the proceeds of a non-recourse tax-exempt financing. Non-recourse financing assumes that lenders will buy the ICE Project s bonds based solely on the Project s net toll revenues (net toll revenue is assumed to be toll revenues minus annual operating and maintenance (O&M) expenses). Periodic capital costs for major maintenance are not included. Lenders require that non-recourse projects issue 100 percent of the debt before construction in order to guarantee project funding will be available. If toll revenues are the only source of the ICE Project debt payment, who will guarantee the payment of short-term or periodic construction bonds that mature before construction completion? Sperry 3
Non-Recourse Financing Eight major ICE Project non-recourse debt risks include: Construction costs Technical Construction delay Air quality Traffic and revenue realization Operational Force majeure Political The greatest challenge for the ICE Project may be the estimated 10-year plus construction period. Non-recourse financings require capitalized interest until the project is complete and generates sufficient revenue to pay debt service. The ICE Project bonds credit ratings will reflect the rating agencies and lenders risk assessments, including their views on the quality of the traffic and revenue report. Due to the unique aspects of the proposed ICE Project transaction, the financing model herein assumes a BBB- rating (based on a minimum 1.75x debt service coverage projection. Sperry 4
Risks and Risk Mitigation Risk Risk Mitigation Comment Negative lender reaction Local, state, fed grants Largest ever non-recourse financing Construction cost/delay Design-build (DB) contract Size probably prevents DB contracts Optimism bias Large contingency Bias higher for complex projects Lack of sponsor equity Traffic and revenue Local, state, and federal grants Investment grade report; unique demographics Size is impediment Problematic for greenfield tunnel Interest rates Monitor markets closely Long re-development schedule Capitalized interest Equity to write down cost; reduce construction time Reinvestment rates hard to forecast Borrowing cost Federal guarantee Won t materially cut capitalized interest Air quality and commuters Superior ventilation Key to attracting daily commuters? Toll rates Congestion management Need to run tunnel like a business ; pricing; more equity focus on customer experience Safety Sperry Operations focus Key to attracting daily commuters? 5 5
Risks and Risk Mitigation; Transfer Risks to Public-Private Partnership (P3)? A P3 procurement can offer an attractive solution for challenging infrastructure projects A design-build-finance-operate-maintain procurement offers an integrated approach to project delivery, lifecycle costs and operations Nonetheless, an ICE Project P3 would finance the same challenges as a public concession The eight major non-recourse risks outlined on page 4 The 10-year plus construction schedule and the resulting cost of capitalized interest The leading P3 concessionaires with large tunnel expertise are: ACS Bouygues Travaux Publics Vinci (Cofiroute) Sperry 6
Today s ICE Project Financial Model: Simplified ICE Project financial model assumptions: Costs (current 2010 dollars) Construction cost: Annual O&M $8.6 billion with contingency $51.7 million with contingency Costs (escalated dollars) Environmental and final design Construction Annual O&M starting in 2030 Periodic major maintenance $301.6 million $13.38 billion $96 million Not included Sperry 7
Today s ICE Project Financial Model: Simplified Reversible traffic direction one tunnel No additional truck tolls Peak hours tolled higher Average toll $14 each way Tolls range from $4 to $20 55,000 daily trips = $278 million or $500 million @ ~3 percent CPI inflation 65,000 daily trips = $347 million or $526 million @ ~3 percent CPI inflation 65,000 daily trips results in $347 million in toll revenues in $2010 or $626 million in FY 2030 (escalated at an assumed 3.3 percent annual inflation factor) 2008 Stantec traffic and revenue report estimates that in 2030 the 91 Express Lanes will attract 47,600 daily trips at an average daily toll of $5 resulting in $101.1 million in annual revenue Sperry 8
Today s ICE Project Financial Model: Simplified This analysis assumes that the ICE Project will be a non-recourse financing based solely on the Project s net toll revenues Non-recourse financing risks require that 100 percent of the debt be issued at the same time in order to ensure that 100 percent of the construction costs are realized at the initial funding rate so that pro forma cash flow projects are not dependent upon additional market access at an unknown interest rate The base case bond assumptions are: $31.8 billon (with $3.5 OID) produces $28.3 billion bond proceeds Bonds issued on July 1, 2017 45 years, interest only for the first 17 years and that the principal will be amortized on an ascending basis over the last 28 years All-in interest cost of 7 percent Six month debt service reserve fund earning 6.95 percent (arbitrage yield) Project fund and capitalized interest fund earn 5 percent BBB- investment grade ratings Sperry 9
Today s ICE Project Financial Model: Simplified The challenge of 10-year plus construction schedule requiring a $17.9 billion capitalized interest contribution (assuming a 5 percent investment rate) will be difficult to overcome overcome. Sperry 10
ICE Project Financial Model: Simplified Options to reduce the annual gap between revenues and net debt service + coverage + O&M The ICE sponsors may receive a significant amount of state and/or federal equity A technical solution that significantly reduces the length of construction could significantly reduce capitalized interest and, thereby, the size of a bond issue Tax exempt borrowing rates may drop Investment rates may return to rates higher than tax exempt borrowing rates A P3 concessionaire may find a 99 year lease enhances financial feasibility Subordinate lien TIFIA Loan at SLGs rate; 5 year ramp up grace period with zero amortization; 35-year maturity The 45 year base case structure has 13 years interest only and 32 years principal amortization; the markets may be willing to accept a longer maturity in FY 2018 New national infrastructure bank may offer grants and/or debt guarantees Metropolitan Water District and other utilities may purchase tunnel capacity Sperry 11
ICE Project Financial Model: Never Simple A 10-year plus construction period requires capitalized interest until the ICE Project generates sufficient revenue to pay debt service. 10-years plus is a very long time to wait for revenues;and no matter what investment rate is assumed. Investment rates are critical. The baseline financial model requires the deposit of $17.9 billion into a capitalized interest fund at closing invested at 5 percent just to pay capitalized interest on the bonds for 10-years plus before the ICE Project can generate tolls sufficient to pay debt service, O&M and required coverage. Sperry 12
Questions? Sperry 13