INDIANAPOLIS – Reports both nationally and internationally have heated up in recent weeks questioning the financial health of the foreign companies that leased the Indiana Toll Road three years ago, but state officials are maintaining their cool.
We’re certainly following it closely from an operational standpoint and reviewing their finances, said Ryan Kitchell, head of the Indiana Office of Management and Budget. But we’ve always been more concerned about the operation of the road.
Kitchell also has an ace in his pocket – the provisions of the lease that protect the state from dire circumstances.
In 2006, a Spanish-Australian consortium paid $3.8 billion for the right to operate and collect tolls until 2081 on the road that stretches across the northern part of the state.
From there, the leaseholders created the Indiana Toll Road Concession Co. LLC to operate, maintain and improve the road. Macquarie Infrastructure Group, the Sydney-based Toll Road fund, owns a 25 percent stake in the lease while New-York based Macquarie Infrastructure Partners owns another 25 percent.
The remaining half is held by Cintra Concesiones de Infraestructuras de Transporte SA of Spain.
Speculation related to the financial health of certain listed infrastructure funds managed by Macquarie – fueled by the sale of some of its assets – has spurred state, national and international reports in recent weeks suggesting MIG is in trouble.
Kitchell said the bulk of the chatter revolves around Macquarie, not Cintra. He noted also that several key employees at the Indiana Toll Road Concession Co. come from the Cintra side of the deal.
He said state officials haven’t had discussions with either side about selling off their interest in the Toll Road.
Macquarie spokesman Alex Doughty said the Toll Road fund’s sound financial position is well documented. And he confirmed MIG is not in the market pursuing a sales process for any of its U.S. assets, including the Indiana Toll Road. Speculation suggesting otherwise is simply incorrect.
Doughty said some of the rumors started in March when Macquarie Group put out a statement saying there was a valuation gap between the listed share price and the value of assets in various funds.
Generally, there was a concern that some of the funds were leveraged too much, and management outlined ways it would consider to close those valuation gaps.
As a result, a Canadian pension fund has since bought Macquarie’s communications fund, and its airport fund is seeking shareholder approval to internalize its management.
While House Speaker Pat Bauer, D-South Bend, has recently engaged in a war of words with Macquarie, other Democrats don’t seem as concerned.
It’s a unique and difficult financial circumstance for them. They are completely upside down from what they expected and they have to raise some capital, said Rep. Win Moses, D-Fort Wayne.
Having said that, though, Moses thinks the protections in the lease are adequate and, there’s not much to worry about.
He thinks Macquarie will retain ownership of the lease because the money to be made comes only after the initial debt is paid off and tolls can continue to rise – primarily during the last 60 to 65 years of the lease.
Just in case, Kitchell, who largely wrote the lease, answered a few questions about how Indiana would fare under different scenarios.
Q. What would happen if the lease owners or operator stops maintaining the road?
A. Under the lease, the Indiana Toll Road Concession Co. is required to adhere to a vast array of operating standards. This includes how quickly potholes are filled and snow is removed and making hundreds of millions in capital investments to reduce congestion.
Kitchell said the lease sets up a dispute resolution process that could ultimately end with an Indiana arbitrator finding the operator in default and voiding the lease.
The state is even allowed to go ahead and cure problems on the road and bill the operator while this process is ongoing.
Q. Can Cintra or Macquarie sell its ownership stake in the lease?
A. Yes. Under the agreement, if there is a change in control – 50 percent or more of the interests – the state has no say if it is transferred to an entity in the U.S., Canada, Europe or Australia. But if the new owner would come from somewhere else, the state would have to consent.
Q. What would happen if the operators of the road would change?
A. Kitchell said because the operator has day-to-day control of the road, the state would have to approve any such change.
Q. If there is a default of some kind or a bankruptcy, can Indiana get the road back and lease it again?
A. Possibly. Kitchell said the consortium had to borrow much of the lease price to start with and the lenders could protect their investment by stepping in and finding new operators before it got to that point. But theoretically, the state could get the rights to the road back under the right circumstances.
Q. What could the state get if it sold the lease again?
A. Less than $3.8 billion.
With traffic counts declining on the Toll Road and the credit market tight, Kitchell said the state likely wouldn’t receive bids anywhere near as high. In fact, he pointed to one recent analysis that found the value of the lease has plummeted to just $445 million in three years.
Regardless of all the theoretical questions, Kitchell makes clear that he and other state officials are happy with the lease so far, noting improvements in congestion and electronic tolling while pointing to toll increases and maintenance deferral in other states.
Folks that seem to be worried about what’s going on with Macquarie are not focused on what we think is most important – how the road is being maintained and operated, Kitchell said.