Early this month, the SH 130 Concession Company in Texas filed for Chapter 11 bankruptcy. The company was formed by Cintra and Zachry to finance, build, operate, and maintain Segments 5 and 6 of the SH 130 toll road that parallels congested I-35 between Austin and San Antonio. As is usual in such situations, the company is continuing to operate and maintain the toll road during the bankruptcy process, while it continues discussions with its lenders on restructuring the project’s finances for the longer term.
P3 opponents have seized on this event, implying that it proves that P3s are a bad idea. While it might turn out to be a bad deal for the bond-holders and the equity providers (Cintra and Zachry), the restructuring should have no adverse impact on toll road customers or on taxpayers. There have been several such bankruptcy filings for U.S. toll roads during the past decade, and several others in Australia. In none of these cases have toll road users been adversely affected, nor have there been any taxpayer bailouts.
P3 concession projects that have filed for bankruptcy share one common feature. As Virginia DOT’s P3 Director Doug Koelemay pointed out in a January 29th Brookings post, the projects that have gotten into trouble all based their financial plans on overly optimistic traffic and revenue projections carried out prior to the Great Recession. The SH 130 project was financed in 2008, based on such projections. Projects in those years were also highly leveraged, with a high ratio of debt to equity. A large amount of equity provides a cushion, in case revenue goes below projections. In a toll road financial structure, all the debt providers are entitled to get paid on schedule; the equity providers are in second place. So if the financing is 80% debt, and toll revenues are only half what was projected, the company would be in a much worse situation than if only 60% of the financing was debt and needed to get paid out of the toll revenue.
There are two main alternative outcomes of the bankruptcy proceeding for a P3 toll road, depending on the numbers and the players involved. If the current traffic and revenue projections are positive enough, the bondholders may be willing to renegotiate the financing, altering the debt structure and/or requiring the equity providers to put in more equity. In that case, the concession company would continue as the operator of the facility. If no such agreement can be reached, the bondholders typically have the right to put the company into receivership, seeking a new concession company to take over the remaining years of the concession under an agreeable financing plan. In that alternative, the original equity providers might lose all of their equity investment—a risk they accepted when they invested.
This kind of situation demonstrates that risk transfer in P3 concessions is real. Everybody knows that “greenfield” (i.e., brand new) toll roads are risky endeavors. That is a good reason for shielding taxpayers from such risks, by finding private-sector investors with a solid track record of designing, building, and operating toll facilities who are willing to take those risks.
(This column first ran in the March 2016 issue of Surface Transportation Innovations)