LOS ANGELES -- A consortium of firms this week closed on a $125 million financing package for a privately owned and operated toll road in California that could serve as a model for similar ventures, project officials said.
The success in securing financing is an important so such projects "can be made to work without federal or state funds." Gerald Pfeffer, managing director of the California Private Transportation Co., said yesterday.
Proceeds from the financing package -- which includes equity investment and private placement of taxable debt -- will fund construction of a 10-mile tollway in the median of State Route 91, commonly known as the Riverside Freeway.
A groundbreaking is planned next week. The construction schedule calls for completion in 29 months, Pfeffer said.
Route 91 is one of the most congested highways in California and provides the primary link between Orange and Riverside counties. The project, with two toll lanes in each direction, will run from State Route 55 in Orange County to the Riverside County border.
California Private Transportation is a limited partnership controlled by subsidiaries of Peter Kiewit Sons' Inc., COFIROUTE Corp., and Granite Construction Co.
Peter Kiewit is a diversified firm that provides project development, construction management, and financial services; COFIROUTE is the American subsidiary of a French firm that privately develops and operates toll facilities worldwide, and Granite Construction is a highway building company.
A consortium of other engineering, financial, and legal firms also serve on the Route 91 project team. Project participants said they had to jump numerous hurdles before investors signed off on the financing package.
Major issues included the private-public nature of the venture, traffic and revenue projections, and the regulatory and competitive environment for such a project.
The Route 91 tollway is possibly unique in that it is "surrounded by its free competition," rather than a shortcut or an alternate route, said Pfeffer, who is also an executive with Peter Kiewit.
Pfeffer also said the project is the first privately built toll road in the United States during the last half-century, if not longer.
The funding is designed as a non-recourse financing, which means investors rely solely on the project for security rather than being able to turn to a backup pledge from any of the participants. Toll revenues will secure the borrowing.
The biggest source of financing came from $100 million of taxable debt. Of that total, according to Pfeffer, $65 million matures in about 10 to 15 years and was placed with three banks: Citicorp, Banque Nationale de Parts, and Societe Generale.
The other $35 million has a maturity closer to 25 years and was placed with Kiewit Diversified Group, an arm of Peter Kiewit, Pfeffer said. Several institutional investors are interested in investing in all or part of that portion, Pfeffer noted, adding that the borrowing can be placed with institutions "when it appears best to do so."
Pfeffer said he could not discuss details such as interest rates or projected debt service coverage.
"We're somewhat circumspect in what we put out" because of confidentiality agreements," Pfeffer said. It also is necessary at times to play your cards close to your chest" in such private deals, he said, particularly when some of the participants also are involved in other projects that entail sensitive negotiations.
The three equity sponsors in the project -- which control California Private Transportation -- are providing roughly $18 million of the financing package, Pfeffer said.
Finally, about $7 million of subordinated debt has been placed with the Orange County Transportation Authority, Pfeffer said. That debt is a way to repay the authority for funds it expended on an earlier plan for the highway, which would have involved using public funding to build car pool lanes.
Route 91 is being developed under Assembly Bill 680, which became law in 1989 and gave the California Department of Transportation authority to award up to four demonstration franchises to private firms. The franchises grant private firms exclusive rights to finance. design, construct, and operate toll transportation facilities.
Ownership of the tollways is transferred to the transportation department upon completion. The facility is then leased to the developer for up to 35 years, during which the private sponsor can collect tolls to retire debt, pay operating expenses, and earn a return on investment.
The California Private Transportation consortium selected Route 91 for its proposal partly because of high traffic volume and strong local support.
The fully automated tollway will use small electronic transponders, which are attached to motorists' rear-view mirrors, to pay tolls electronically. This technology will avoid the delays and congestion associated with traditional collection methods, according to project participants.
Route 91 also will feature an innovative congestion pricing mechanism, with higher rates during peak traffic hours and lower tolls at other times to make the most efficient use of the new lanes. Tolls are expected to average $1.75, stated in 1993 dollars.
Arranging a private financing, based on such user fees, is "a breakthrough I would hope could solve some of the budget problems" associated with trying to line up scarce public funds for such infrastructure, said Barry Gold, a vice president of Citicorp.
Citibank served as a financial adviser and lead debt arranger on the project.
The three other private projects that were granted franchises by the state are in earlier stages of development. Two of those projects are in Orange and San Diego counties and the other is in Northern California.
California courts have recently rejected challenges to the validity of the franchise process. Some state engineers had questioned the legality of the approach, largely because they stand to lose jobs if the private sector handles the projects.
Pfeffer said project participants "had always felt we were on sound legal ground," and the court decisions helped "reinforce Wall Street's confidence."