November 7, 2012 5:27 pm

Indiana Toll Road paves the way for restructuring with advisors

This article is provided to FT.com readers by Debtwire—the most informed news service available for financial professionals in fixed income markets across the world. www.debtwire.com

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Indiana Toll Road (ITR) has retained Morgan Stanley and Moelis & Co. to help address approximately USD 3.7bn of loans set to mature on the public-to-private partnership’s balance sheet in 2015, two sources familiar with the matter tell Debtwire. The mandates complement management’s ongoing engagement with Kirkland & Ellis as its restructuring counsel, the sources added.

Morgan Stanley’s mandate is to explore capital raising options in light of the surging primary market. Meanwhile, Moelis is charged with weighing liability management scenarios, including a potential restructuring, the sources continued.

While the toll road operator has more than two years until it hits the maturity wall, it runs the risk in the interim of bleeding dry its interest reserve account. Amid an ongoing battle with negative operating conditions such as declining traffic, the pressure on ITR’s earnings has accelerated the drain on the reserve account. The account totaled just around USD 40m back in March, down from the USD 150m allotted when the project was conceived in 2006, as previously reported by Debtwire.

On a positive note, traffic revenue has improved over the course of this year, up 7% year to date and 5.2% in the 3Q12, according to company filings.

ITR’s credit facility consists of a USD 3.2bn series A term loan, USD 100m series B liquidity facility, and USD 385m series C capex facility. All of the debt comes due in 2015, and bids on all three tranches has been handing around 44/47, according to Markit.

Adding to the balance sheet stress, interest rates on ITR’s bank debt and fixed-rate swap agreements are set to increase. Margins on the term loan will rise to Libor+ 125bps in 2014, up from the current L+ 110bps rate. The fixed rate in each swap contract increases every two years to 3.65% from 30 June 2011 to 30 June 2013, to 4.15% until 30 June 2015, and all the way up to 11.29% in the final year of the swap agreement, which expires on 30 June 2026.

A default event could put ITR at risk of losing its concession to operate the road, said two advisors and a capital markets banker. The concession agreement states that if Indiana Toll Road Concession Company (ITRCC) files for Chapter 11, ITR’s counterparty to the concession, the Indiana Finance Authority, could terminate the agreement with ITRCC, noted the two advisors, who are familiar with the agreement.

But if a previous restructuring of public-private California toll road South Bay Expressway is any guide, ITRCC could find a way to hang onto the concession agreement while also wiping out the equity investment of sponsors Cintra Infraestructuras and Macquarie Infrastructure.

In 2010, South Bay Expressway, which Macquarie owned via California Transportation Ventures Inc., filed for bankruptcy. As part of the restructuring, Macquarie’s equity interest was wiped out and its 35-year franchise agreement with the State of California Department of Transportation was transferred to a a group of prepetition lenders who got partially equitized.

Once out of bankruptcy, the post-petition equity holders of South Bay then sold the agreement — which was preserved by the debtor through the case — along with their equity interest to the San Diego Association of Governments (SANDAG), according to a SANDAG spokesperson.

For their part, ITR lenders are ready for action. A steering committee of lenders — led by credit facility agent RBS — has interviewed a list of six financial advisors for a potential mandate, said the sources familiar. Advisors that pitched include Lazard, Evercore, and FTI Consulting. The committee has already engaged Orrick Herrington & Sutcliffe LLP as legal counsel, as previously reported by Debtwire.

Many of the steering committee members in the loan group also have cross positions in the swap agreement, said one of the sources familiar. The committee includes RBS, BBVA Group, Depfa Bank plc, Banco Santander, Bankia SA, UniCredit, Bayerische Landesbank, and BNP Paribas.

Macquarie, Lazard, Evercore and RBS declined comment. Morgan Stanley, FTI and Cintra did not return calls seeking comment.

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