the p3 capital stack: balancing debt & equity · financing debt/equity (gearing): 93:7 minimum...
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The P3 Capital Stack: Balancing Debt & Equity Intro Public-Private Partnership (P3) Finance CDFA WebCourse
June 20, 2018
Infrastructure Terms and Concepts
3
P3 Transaction Structures
Financial Structure
E
Payment Mechanism
D
Delivery Model
A
Availability Payment User Fee (Tolls)
Private Equity Bonds
Federal/State Financing
Facilities (TIFIA, WIFIA,
SIB)
Bank Debt Public Funds
Milestone Payment
Risk Allocation
B
Contractual Structure
C
Design-Bid-Build Design-Build Design-Build-
Operate-Maintain Design-Build-
Finance Design-Build-
Operate-Maintain
Full Concession/ Development
Rights
Consultancy Contracts
Service Contracts
Management Contracts
DBF Contracts DBFO Contracts Lease Full Concession/
Development Rights
Public Responsibility Private Responsibility
The P3 Capital Stack
4
Indicative P3 Commercial Structure The P3 Capital Stack
■ Paid before equity
■ Termination
■ Pre-completion security
■ Appropriations
Lenders
Special Purpose Vehicle
(Developer)
■ State/Federal tax
■ State Appropriation
■ Grant of right
■ Funding
Public Sector
Equity funding
Distributions Bond or loan proceeds
Debt Service
Asset &
Service
Payments
Progress
Payments
Asset
Service
Payments O&M services
Tolls
Service
■ Project revenue (tolls,
fares, fees…)
Users (if user fee project)
■ Revenue (after O&M and
debt service)
■ Financing
■ Tax
Equity
■ Cost overruns
■ Time/Delays
■ Design
■ Defects
DB Contractor
■ Cost overruns (shared)
■ Delivery of O&M
■ Availability/Performance
O&M Contractor
5
P3 Opportunities by Sector The P3 Capital Stack
Sectors
Airports
Roads
Parking
Crossings
Transit
Rail
Marine Ports
Transportation
Courthouses
Detention facilities
Office buildings
K-12 Schools
Higher Education
Laboratories
Healthcare
Sports
Social Infrastructure
Water
Wastewater
Street lighting
Broadband Communications
Utilities
New build infrastructure projects that are publicly owned and privately constructed,
financed, and potentially operated/maintained Greenfield
Existing infrastructure assets that are monetized by public authorities or equity sale
transactions in the secondary market
Brownfield
Asset Monetization
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Funding versus Financing The P3 Capital Stack
■ Public money available to the project that is not intended to be
repaid or carry a cost (i.e. no interest or return on investment).
Typical sources include:
■ Construction period payments (milestone payments,
construction completion payments)
■ Operations period payments (availability payments, lease
payments, user fees (water rates, sewer rates))
■ Funding sources – federal funds, state funds, user fee
revenues, sales tax revenues, property taxes
Funding Financing
■ Money provided by private investors to pay for construction
costs, concession payments and other large project costs.
■ Capital is intended to be repaid and does carry a cost (i.e.
interest and return on investment).
■ Typical sources include:
‒ Debt (capital market bonds, bank loans, federal/state
financing facilities)
‒ Equity
The P3 Capital Stack
8
The P3 Capital Stack – Debt Financing The P3 Capital Stack
Select Short-to-Medium Term Debt Financing Facilities
Select Long-Term Debt Financing Facilities
Taxable Bank Facility – Term Loan Taxable Bank Facility – Revolver Tax-Exempt Bank Facility
Mezzanine/Term Loan B Tax-Exempt Private Activity Bonds Taxable Private Placement
TIFIA / WIFIA Tax-Exempt Private Activity Bonds Taxable Private Placement
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The P3 Capital Stack – Equity Investment The P3 Capital Stack
Private Equity
Fund life is typically 7-10 years
Target Brownfield assets
Infrastructure Funds
Fund life is typically 10-25 years or perpetual (open-ended)
Target Greenfield assets with construction risk and long-term operating concessions
Strategic Investors
Developers – Most returns on investment achieved at Financial Close, may have minority investment
Contractors – Typically less than 10% of equity (1%-4% of total capital stack)
Operators – Typically minority investor, provide long-term facilities maintenance/management
Concessionaires – investors who are typically involved in the full life-cycle of asset and own contractor and operator and take
majority equity position
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Construction Operations
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Mill
ion
s Indicative Availability Payment Style P3 Transactions The P3 Capital Stack
Source: Publicly available information, InfraAmericas, P3 Bulletin, IJ Global
(1) *KBCM estimate or publicly available (all dates and $ size subject to change)
Typical Availability Payment P3 Payment Mechanism
Construction
Payments
• Appropriation backed
• Funds construction costs
• Repay short-term financing
• Construction risk
• No DSCR
Final
Acceptance
Payments
Availability
Payments
• Appropriation backed
• Repay medium and long-term financing
• Construction & ops risk
• 1.25x DSCR
Bank Revolving Facilities Bank Term Loans & Amortizing Facilities Private Placements Bonds
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The P3 Capital Stack The P3 Capital Stack
Revenue P3 or Asset Monetization Availability Payment
Greenfield Social Infrastructure Projects
Taxable Private Placement, Equity
Greenfield Transportation Projects
Tax-Exempt Private Activity Bonds, TIFIA, Equity
Brownfield Transactions
Taxable Bank, Taxable Private Placement, Equity
Greenfield Social Infrastructure Projects
Taxable Private Placement, Equity
Greenfield Transportation Projects
Tax-Exempt Private Activity Bonds, TIFIA, Equity
60
75
40
25
Greenfield Browfield
Debt Equity
90
10
Greenfield
Debt Equity
% %
%
%
%
%
Tax-Exempt Availability Payment P3
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Non-Profit, Tax-Exempt Availability Payment Structure The P3 Capital Stack
Tax-Exempt Borrower/Concessionaire: 501(c)(3), 63-20 Corporation, or Certificates of Participation
Financing Structure: Tax-Exempt Senior Bonds and Subordinated Bonds
Base Rent equals debt service on the Senior Bonds
Additional Rent repays maintenance expenditures and Subordinated Bonds; may be reduced for performance deductions
IRS Revenue Procedure 2017-13
Maintenance contract under a Qualified Management Contract that may not exceed 30 years
IRS Revenue Procedure 2016-44
Indicative Availability Payment Structure for Tax-Exempt Solution
Key Features
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Capital Portion
Maintenance Portion
Concession Year
Base Rent:
Repays Senior Debt, not
subject to performance
deductions
Additional Rent:
Repays maintenance
expenditures and
Subordinated Debt,
subject to performance
deductions
Base Rent
Additional Rent
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Non-Profit, Tax-Exempt Availability Commercial Structure The P3 Capital Stack
■ Tax-Exempt Conduit
Issuer
■ In-state or out of state
■ Upfront and recurring fees
Conduit
Special Purpose Vehicle
(501c3 or 63-20)
■ State/Federal tax
■ State Appropriation
■ Grant of right
Public Sector
Loan proceeds
Base Rent and
Additional Rent
Asset &
Service
Base Rent
and
Add’l Rent
Progress
Payments
Asset
Additional
Rent O&M services
■ Cost overruns
■ Time/Delays
■ Design
■ Defects
DB Contractor/Developer
■ Add’l rent subject to
deductions
■ Cost overruns
■ Delivery of O&M
■ Availability/Performance
O&M Contractor/Developer
■ Same risks as senior debt
■ Add’l rent subject to
deductions
■ Held by developer or
operator
Subordinate Lenders
Add’l
Rent -
Debt
Service
Bond
proceeds
■ Paid before sub debt
■ Termination
■ Pre-completion security
■ Appropriations
Senior Lenders
Base
Rent -
Debt
Service
Bond
proceeds
Benefits: • Structure mimics equity P3
• 100% tax-exempt debt
• Substantial risk transfer
• Payment mechanism incentivizes
performance
Considerations: • While developer/operator holds
sub debt, they do not directly
control SPV
• Untested structure
• Volume debt commitments only
Sectors / Case Studies
16
Appendix B – P3 Case Studies
Transportation
Transportation Managed Lanes P3 Examples
Project Selected Case Study
I-4 Ultimate Project
Florida Department of Transportation (FDOT)
Project Status: Financial Close: 2008
Project Size: $2.3 billion
Delivery Model/Payment Mechanism: DBFOM
with Availability Payment
Winning Consortium: John Laing, Skanska,
Granite Construction, Lane Construction Corp
I-4 Ultimate Project
Florida Department of Transportation (FDOT)
Background
■ The I-4 Ultimate project is P3 concession agreement to design, build,
finance, operate and maintain 21 miles of road from west Kirkman Road in
Orange County to east of State Road 434 in Seminole County. The
contract has a 40-year term, including construction, which began in 2015
and is expected to be completed by 2021
Challenge
■ Florida needed a solution to heavy congestion in the region.
■ The project included large scale construction, under which traditional
procurement would have been procured with multiple contracts contributing
to a much longer procurement timeframe
Solution
■ The express lanes of I-4 will be operated with variable tolls which will be
adjusted to improve traffic flow throughout the corridor (FDOT will retain
the revenue and control the tolls)
■ Under the P3 legislation the entire USD $2.32 bn project can be procured
in one fixed price transaction. It will begin construction in 2015 and be
completed by 2021
Financing
■ Debt/Equity (Gearing): 93:7
■ Minimum DSCR 1.17x; Average DSCR 1.23x
■ Bank Debt $483 million; TIFIA $948 million; FDOT grant $688 million;
Equity $146 million
I-495 Capital Beltway
Virginia Department of Transportation (VA)
Project Status: Financial Close: 2008
Project Size: $1.9 billion
Delivery Model/Payment Mechanism: DBFOM
where private sector takes revenue risk
Winning Consortium: Transurban, Fluor, Lane
LBJ I-635
Texas Department of Transportation (TX)
Project Status: Financial Close: 2010
Project Size: $2.7 billion
Delivery Model/Payment Mechanism: DBFOM
where private sector takes revenue risk
Winning Consortium: Cintra, Meridiam, Dallas
Police and Fire Pension System , Ferrovial
Source: Publicly available information, InfraAmericas, P3 Bulletin, IJ Global, EMMA
17
Higher Education P3 Examples
Project Selected Case Study
University of California Merced
The Regents Of The University Of California
(CA)
Project Status: Financial Close: 2016
Project Size: $1.3 billion
Delivery Model/Payment Mechanism:
DBFOM
Duration: 39 Years
University of California Merced
The Regents Of The University Of California (CA)
Background
■ The Regents’ expansion represents the second phase of campus development
under the Long Range Development Plan to support projected enrollment
growth from 6,200 current students to 10,000 students by the year 2020
■ The Project will be located on approximately 219 acres, which includes the
existing 104- acre campus, and will involve up to 1.85 million square feet of
new facilities
Challenge
■ Rapid growth in student demand for admission to UC Merced outstrips the
campus’ limited physical capacity to accommodate that demand
Solution
■ Private sector expertise and innovation in design, management and financing
solutions may assist in completing the Project more quickly and efficiently
■ A partnership with a private sector partner may assist the Regents in managing
certain risks associated with the design, construction, financing, operation and
maintenance of its capital facilities
Financing
■ Debt/Equity (Gearing): 92:8
■ Private Placement $660 million; UC Merced grant $600 million; Equity $60
million
Ohio State University Energy Project
Ohio State University (OH)
Project Status: Financial Close: 2017
Project Size: $1.0 billion
Delivery Model/Payment Mechanism:
Public-to-Private
Duration: 50 Years
Wayne State University Student
Residential Facilities
Wayne State University (MI)
Project Status: Financial Close: 2017
Project Size: $308 million
Delivery Model/Payment Mechanism:
DBFOM
Duration: 40 Years
Appendix B – P3 Case Studies
Higher Education
Source: Publicly available information, InfraAmericas, P3 Bulletin, IJ Global, EMMA
18
Social Infrastructure P3 Examples
Project Selected Case Study
Nassau Veterans Memorial Coliseum
Nassau County (NY)
Project Status: Preferred Proposer Selected
Project Size: $229 million
Delivery Model/Payment Mechanism: lease
Nassau Veterans Memorial Coliseum
Nassau County (NY)
Background
■ Nassau County announced its intention to scale
down the Nassau Veterans Memorial Coliseum. On
March 12, 2013, the County formally issued an
RFP, seeking a private company to reinvent the
Uniondale complex. The plan is to downsize the
arena from its current 16,000-seat capacity to the
vicinity of 10,000 seats.
Challenge
■ Aging of infrastructure
Solution
■ The deal includes better sponsorships, high profile
professional sports games and other revenue
opportunities
Financing
■ Multiple-phase project with debt and equity
Long Beach Court House
California Administrative Office of the Courts (CA)
Project Status: Financial Close: December 2010
Project Size: $495 million
Delivery Model/Payment Mechanism: Availability Payment
Howard County Courthouse
Howard County, Maryland
Project Status: Procurement
Project Size: $150 million
Delivery Model/Payment Mechanism: Availability Payment
Appendix B – P3 Case Studies
Municipal Facilities – Buildings/Sports facilities
Source: Publicly available information, InfraAmericas, P3 Bulletin, IJ Global, EMMA
19
Appendix B – P3 Case Studies
Utilities – Water and Wastewater
Water and Waste Water P3 Examples
Project Selected Case Study
Bayonne Water & Wastewater Concession
Bayonne Municipal Utilities Authority (NJ)
Project Status: Financial Close: 2012
Project Size: $173 million
Delivery Model/Payment Mechanism: Public-to-
Private
Bayonne Water & Wastewater Concession
Bayonne Municipal Utilities Authority (NJ)
Background
■ KKR and United Water have formed a joint venture, Bayonne Water Joint
Venture LLC, to maintain and operate a 40-year water and wastewater
concession from the City of Bayonne, New Jersey.
Challenge
■ Bayonne’s failing credit problem.
■ Increasing rates to keep systems running.
■ Old meter systems
Solution
■ Eliminates Bayonne’s contingent liability for debt on the BMUA and a
large waterside redevelopment project that’s on the BMUA’s books.
■ Brings in coinvestor United Water under a 40-year contract with KKR to
upgrade, operate and maintain the capital‐starved system and cure
inefficiencies.
■ Brings rate‐payer stability to a troubled public utility
Financing
■ Debt/Equity (Gearing): 64:36
■ Private Placement $110 million; Equity $62 million
Rialto Water System P3
Rialto Utility Authority (CA)
Project Status: Financial Close: 2009
Project Size: $172 million
Delivery Model/Payment Mechanism: Public-to-
Private
Carlsbad Seawater Desalination Plant
San Diego County Water Authority (CA)
Project Status: Financial Close: 2012
Project Size: $903 million
Delivery Model/Payment Mechanism: Water
Purchase Agreement
Source: Publicly available information, InfraAmericas, P3 Bulletin, IJ Global, EMMA
20
Infrastructure Technology P3 Examples
Project Selected Case Study
MBTA Automated Fare Collection P3
Massachusetts Bay Transportation Authority
(MA)
Project Status: Financial Close: March 2018
Project Size: $253 million
Delivery Model/Payment Mechanism: DBFOM
with Availability Payment
Duration: 13 Years
MBTA Automated Fare Collection P3
Massachusetts Bay Transportation Authority (MA)
Background
■ The MBTA is seeking private partners to design, finance,
operate and maintain an automated, account-based open fare
system. The system is intended to replace the MBTA’s current
fare collections system, and enable customers to pay fares by
tapping contactless bank cards, mobile phones and fare cards
Challenge
■ The MBTA’s current fare collections system is limited in its
ability to support a robust set of fare policies for public
transportation
Solution
■ The automated system replaces the MBTA’s current fare
collections system to provide for an integrated, reliable and
convenient fare payment and collection system
Financing
■ Debt/Equity (Gearing): 89:11
■ Bank facility $226 million; Equity $27 million
Washington DC Street Light Modernization
Washington DC Office of Public-Private
Partnerships (DC)
Project Status: Shortlisted Proponents
Project Size: $125 million
Delivery Model/Payment Mechanism: DBFOM
with Availability Payment
Duration: N/A
Pennsylvania Fiber-Optic Broadband
Network
Pennsylvania Turnpike Commission
Project Status: Shortlisted Proponents
Project Size: $200 million
Delivery Model/Payment Mechanism: DBFOM
Duration: 30 Years
Appendix B – P3 Case Studies
Infrastructure Technology
Source: Publicly available information, InfraAmericas, P3 Bulletin, IJ Global, EMMA
21
The P3 Capital Stack
Questions?
22
Thomas Mulvihill, KeyBanc Capital Markets – Contact Information The P3 Capital Stack
Tom Mulvihill is a Managing Director and Group Head of KeyBanc Capital Market’s Infrastructure and Public-Private
Partnerships (P3) Business. He brings more than 20 years of U.S. Capital Markets experience from both public and
project finance. Tom’s experience includes strategic and financial advisory services, transaction structuring,
procurement and execution for clients in the transportation, social infrastructure and utility sectors.
Prior to joining Key, Tom was a Managing Director with KPMG Corporate Finance in their Infrastructure Advisory
practice focusing on Public-Private Partnerships. He served clients such as New York City (Economic Development
Corporation; Office of Management and Budget; and Department of Environmental Protection); Dormitory Authority of
the State of New York; Nassau County, NY; Massachusetts Bay Transportation Authority; Amtrak; Massachusetts
Department of Transportation (DOT); Pennsylvania DOT; Virginia DOT; Florida DOT; Puerto Rico Public-Private
Partnerships Authority; Purdue University; Long Island University; University of Massachusetts Building Authority; and
Yonkers Public Schools.
Prior to joining KPMG, Tom spent more than 15 years in the financial guaranty insurance industry for companies such as
XL Capital Assurance (XLCA) a “start-up” company where he helped establish and lead their U.S. Infrastructure and P3
Business. Tom served as a member of the Public Finance Team including the Credit Committee. He also worked at
Ambac Assurance where he led their Sports Finance Business and was a senior member of the Public Finance Team.
While in the financial guaranty industry, Tom served clients such as: Cintra/Ferrovial; Macquarie; Babcock & Brown;
John Laing; Los Angeles Dodgers; New England Patriots; St. Louis Cardinals; Denver Broncos; Georgia State
University; University of Arizona, University of Maryland – University Park, Slippery Rock University among others.
Tom earned his Bachelors in Business Administration and Masters in Business Administration from Pace University. He
is a Finra-registered representative with his Series 7 (General Securities Representative), 24 (General Securities
Principal) and 63 (Uniform Securities Agent – State Law) licenses.
Thomas Mulvihill Group Head, Infrastructure
New York, NY
212.284.0553 office
917.375.4445 mobile