Debtwire, a London Financial Times wire service claims the Indiana Toll Road Concession Company (ITRCC) is in danger of defaulting on its debt as early as the first months of next year (2012). The wire says ITRCC has been rapidly “burning through” an interest reserve account which threatens to put it out of compliance with reserve provisions of its $4.1b in bonds.

The principal lender to ITRCC is the Royal Bank of Scotland which Debtwire says has assigned the loan to its “workout” department. The wire report says the interest reserve account could be depleted by the end of 2011.

ITRCC is a joint 50/50 percent venture of Cintra and Macquarie. A Cintra spokesman said merely that the reserve account was intended for drawing upon during a recession and low traffic like that presently experienced by the US. A Macquarie spokesman said simply that no default is expected.

Traffic and revenue have been well below expectation since the 75 year concession was signed with the state of Indiana at the height of the boom in June 2006. Toll revenues in 2010 were $164.2m versus interest expense on debt of $268m.

There were $9m of non-toll revenues mostly from the leasing of rest stops for total revenue of $173.3m.

Expenses included toll collection $9.6m, routine repairs and maintenance $8.7m, other operating costs $16.3m for total operating expense before depreciation of $34.5m.

That generates EBITDA (earnings before of interest taxes depreciation and amortization) of $138.8m. Depreciation and amortization was $79.7m making a profit before interest expenses of $59.1m.

It’s $268m in interest expense that is killing the ITRCC.

In 2010 that interest plus a derivative loss (from hedging interest rate swaps) of $51.9m converted a modest operating profit into the net loss of $260.8m.

In mid-2006 ITRCC paid the state of Indiana $3.8b in one-time rent for the 75 year concession on the road. Cintra and Macquarie each put in $374m to produce an equity at start of $748m. They borrowed $4.1b.

They appear to be paying 6.5% interest to the Royal Bank of Scotland and associated lenders (268/4100). The bulk of the debt on the concession ($3,685m) is less-than-10 year debt due in 2015.

The concessionaires made major capital improvements including third laning in the west, and other bridge and pavement repair as well as an improved toll system.

Transactions 35% low

Traffic is reported by Macquarie as 74.6k/average day or 27.2m/yr in 2010.

We don’t know what traffic and revenue forecasts Cintra and Macquarie used, but forecasting for the state (INDOT) was Wilbur Smith Associates (WSA) “Rate Review and Revenue Projections Study” August 2005. Indiana Finance Authority commissioned Crowe Chizek & Company’s “Indiana East-West Toll Road Financial Analysis” dated March 2006.

WSA had a forecast of transactions and revenues in six different columns, each for a different combination of toll rates (see nearby). At the time of the forecast the ITR had toll rates of 4c/mile for cars and 14.6c/mile for tractor trailers, while by WSA estimate maximum revenue would be gained with tolls of around 13c/mile for cars and 44c/mile for the big rigs.

Toll rates under state control were about a third of the market or revenue maximizing rates!

They’ve been pushed up a bit according to the maxima allowed by the concession – to 5.6c/mile for cars and 22.4c/mile for tractor trailers at present and another small increase goes into effect July 1. That puts them between two WSA transactions forecast columns 47.2m and 37.8m. If the middle point is used you get 42m as the forecast for current toll rates so actual 27.2m traffic is a huge shortfall – about 35%.

$s down 17% on forecast

Toll revenue using the same ‘middling’ should be $196m for 2010 compared to actual $164m, making it a 17% shortfall on forecast.

(Traffic so-called is actually toll transactions and the ITR is a barrier system of toll points over the mainline in its western commuter heavy/car heavy portion, versus a ticket system in its long stretch east which is almost a truckway. Transaction counts overweight the importance of the barrier portion and commuter car traffic because a relatively short trip there may be 2 or 3 transactions whereas all trips on the ticket portion are the single transaction even for driving its length. Traffic has obviously dropped most on the barrier system portion out west.)

Crowe Chizek & Co assumed much smaller debt by the concessionaire and higher equity – about one tenth the debt ITRCC actually assumed. Debt service was put at a mere $24.8m in 2010 versus the actual $268m in interest.

COMMENT: That’s where the problem lies – assuming far too much debt for too variable and uncertain a revenue stream. Easy to say in retrospect though many said at the time that at 40x they paid too high a multiple of cash flow. Even if their traffic were at WSA forecast levels, and even with market toll rates as opposed to concession regulated toll rates, they’d still only have toll revenues of $245m. And with interest payments to be made to borrowers of $268m they’d still be losing money. They must have thought that somehow, someway they could muddle through. Maybe they still can? We’ll see. But this time they can’t blame forecasters for their troubles – editor.

Demerging and stapling

The Macquarie interest in ITR held originally by Macquarie Infrastructure Group along with other weak tollroads was divested (they used the goddawful word ‘demerged’) Feb 2010 to two entities with the name Macquarie Atlas Roads, one with the ending International Limited (MARIL), the other just Limited (MARL) managed jointly by Macquarie Atlas Roads (MQA).

At Macquarie they love to “staple” equities – a peculiarly Australian arrangement – meaning that one stock cannot be bought or sold without buying or selling the other. They call the stapled security of one MARL and one MARIL share Macquarie Atlas Roads (MQA) which security trades on the Australian Stock Exchanges.

This complicated duplication of companies followed by their forced marriage looks like a makework racket by corporate lawyers Downunner.

https://www.getizoom.com/index.jsp

http://www.macquarie.com/mgl/com/mqa

http://www.macquarie.com/mgl/com/mqa/asset-portfolio/indiana-toll-road

annual report

http://www.macquarie.com/dafiles/Internet/mgl/com/mqa/asset-portfolio/do…