This is the second post in a three-part series about privately financed highways. Part one introduced the Indiana Toll Road privatization as an example of shoddily structured infrastructure deals. Part three looks at how faulty traffic projections lead bad projects to get built, and how the public ends up paying for those mistakes.
When you invest in Macquarie Atlas Roads, now-worthless shares in the Indiana Toll Road (and four “Other Toll Roads”) are an almost-free bonus with your purchase of shares in APRR, which runs profitable toll roads in France. Image: Macquarie Atlas’ September 2014 Investor Presentation
Macquarie Group, the gigantic Australian financial services firm with some $400 billion in assets under management, has made a lot of money in the infrastructure privatization game.
The publicly traded company owns the Brussels Airport, the Dulles Greenway, telecommunications towers in Mexico, a wind farm in Kenya, and much more. One of those assets was the Indiana Toll Road, which Macquarie purchased in 2006 with Spanish firm Ferrovial — whose most profitable assets include Heathrow Airport and the 407 toll road ringing Toronto. The Indiana Toll Road was housed in a spinoff company called ITR Concession Co. LLC., which filed for chapter 11 bankruptcy in September after a disastrous eight-year run.
Macquarie and Ferrovial paid the state of Indiana $3.8 billion for the Indiana Toll Road. At the time, it was the largest infrastructure privatization deal in U.S. history. Eight years later, the road was saddled with an astounding $5.8 billion in debt, far beyond the original, unexpectedly-high purchase price.
Traffic fell well short of the projections offered by the engineering firm Wilbur Smith (now CDM Smith), and the company blamed the bankruptcy on the fallout from the recession.
But some observers also pointed to the risky financing underlying the deal. Macquarie and Ferrovial each chipped in just $374 million of their own money to finance the deal. The other $3 billion was borrowed from seven European banks, six of which have since been bailed out by their respective governments.
Granted, the deal happened in 2006, when debt was flowing freely. According to a 2007 profile by Fortune’s Bethany McLean, Macquarie borrowed its billions using loans resembling a balloon mortgage. It would purchase a type of derivative, called an “accreting swap,” to get a low teaser interest rate, all the while assuming that a refinance was just around the corner. But when credit markets froze entirely, Macquarie couldn’t extricate itself from punishing interest payments.
McLean cited the example of the Macquarie-owned Chicago Skyway: “In 2007 the Skyway will pay interest of just $129,000 on $961 million of debt. But the interest payment for 2018 is to be $480 million — that’s not a typo.”
That helps explain how Macquarie and Ferrovial ended up owing almost twice as much as they paid for the Indiana Toll Road, after collecting tolls for eight years.
Randy Salzman, associate editor of Thinking Highways North America, has reported extensively about similar tollway deals and their aftermath, saying it’s common for privately financed roads to go bankrupt. He says that firms acquiring infrastructure typically provide very little of their own cash, and because of a complicated mix of fees and tax breaks, they may benefit financially even when the deals go sour.
“You’d think that they wouldn’t be investing in these things because so many of them go bankrupt,” he said. “You’d think that the money would be running away.”
But Salzman says he’s seen these kinds of bankruptcies happen over and over again. “The only question is when.”