Highway contractor J.D. Abrams, which signed a shadow toll financing agreement with the Texas Department of Transportation Aug. 30, is engaging a public authority to issue tax-exempt bonds and receive semi-annual payments from TxDOT based on traffic volumes.
J.D. Abrams agreed to finance, design and build the El Paso inner loop in exchange for what TxDOT calls pass-through tolls. It's been hailed in Texas as the first pass-through, or shadow toll agreement, with a private partner.
On Sept. 14, the Camino Real Regional Mobility Authority (CRRMA) in El Paso approved a project funding agreement with J.D. Abrams making the CRRMA the conduit issuer of tax-exempt bonds in exchange for fees and other compensation. A trustee will pay J.D. Abrams as the work is completed, and then collect the pass-through tolls from TxDOT for nine to 10 years to pay off the bonds. The bond sales must take place by Nov. 15, or either party can terminate the funding agreement.
"We negotiated the job with TxDOT knowing we would have a conduit bond issuer," says Bill Burnett, vice president of project development at J.D. Abrams. "We factored in that there would be tax-exempt bonds" in determining how much money should be raised and what the minimum shadow toll payments should be.
The total project cost for the 7.4-mile project is pegged at $367.5 million including financing costs. J.D. Abrams will assume all design, right of way, construction and schedule risks. TxDOT is putting in $55 million up front in traditional highway and airport funds, and will pay J.D. Abrams directly from that amount. J.D. Abrams will also receive no more than another $213 million from the proceeds of the bonds sold by CRMMA.J.D.
A Safe Deal
The CRRMA is very nearly guaranteed it won't lose money on the deal. The total of all pass-through toll payments to be received by CRRMA from TxDOT will be $312.5 million. Texas law requires a minimum and maximum payment for pass-through tolls. If bonds cannot be sold so that the minimum shadow-toll payment covers debt payments, J.D. Abrams may terminate the agreement with TxDOT. At the minimum rate set in the agreement, bond repayment would be reached in 10 years. At the maximum rate it would take 9 years.
There is little danger that TxDOT will default on its obligations to make the semi-annual pass-through toll payments. However, TxDOT does not pay unless and until J.D. Abrams does its job.
Two surety companies are issuing performance and payment bonds on the contractor, with both TxDOT and the CRRMA as dual obligees. The bonds will also be insured. If J.D. Abrams fails to meet project deadlines"and pass-through toll payments are withheld"J.D. Abrams must make up any shortfall needed to pay the bond debt.
If the company defaults, the CRRMA can assign the project to a third party contractor to finish the job.
"It doesn't guarantee that we don't have any risk, but it protects us tremendously," says CRRMA chairman John Broaddus. "I can't think of any bugs in this deal. It's just win-win all the way around."
Shadow tolls have been popular in Europe and Latin America as a way to shift some of the risk in building projects to private entities. Texas lawmakers approved pass-through financing in 2003. Prior to the El Paso project, all the pass-through tolling agreements in Texas had been with public entities willing to issue bonds and get reimbursed by TxDOT over time.
Meanwhile, Zachry American Infrastructure is working with Brazoria and Fort Bend counties on a project to finance, widen and maintain U.S. 36 in exchange for pass-through tolls. The counties will amend an earlier pass-through application to TxDOT.
The public-private partnership in El Paso and the use of tax-exempt debt offers several advantages:
- The El Paso area gets a much needed project years earlier than anticipated. The urgency to get the inner loop completed soared with the assignment to Fort Bliss of 20,000 troops and their families as part of U.S. base realignments. J.D. Abrams submitted an unsolicited proposal in 2005, and then was chosen as the best value proposer over competing proposer Zachry American Infrastructure (PWF 1/07, p.1).
- J.D. Abrams has 39 months from when the bonds are issued to get the project opened to traffic, with milestones along the way, or be subject to liquidated damages.
- For TxDOT, which will pay for the road out of a special "strategic priority" fund, tax-exempt debt means lower interests costs and lower negotiated shadow toll payments.
- Abrams will be paid when its work is done, and not have to carry the debt on its balance sheet.
- And the new Camino Real RMA"which held its first meeting June 22"gets start-up money from the bond sale. The authority will receive a closing fee of $500,000 from bond proceeds, plus an annual administrative fee of 0.02% of the outstanding bonds. The RMA's financial advisor is First Southwest. Bond counsel is Fulbright & Jaworski and the underwriter is expected to be Citigroup.
If there's any money left over after the bonds are paid off, the total will be divided equally between the RMA and J.D. Abrams. But Burnett says the project has been structured so tightly, "we see very little money in that pot."