In all of life, it’s always about the money.
Whether you’re building an $800,000 home, an $8 million retail center or an $800 million bridge, financing is the key.
Kentucky officials and executives with Chicago-based The Walsh Group gave a media briefing today at the Galt House to mark July 1 as the official start of construction for the downtown bridge.
Amid talk of piers, street closures and traffic delays (“It’s going to be a construction site,” noted one glib engineer), there was some actual news about the money.
Representatives from the nation’s credit rating agencies were in town last week to assess financial risk related to the bridge bond issue, according to Chuck Wolfe, executive director, public affairs, for the Kentucky Transportation Cabinet.
Executives from Standard & Poor’s, Moody’s and other firms were in Louisville last Wednesday and Thursday for meetings at the Louisville Convention and Visitors Bureau offices with state financial advisers and Kentucky finance and transportation officials, Wolfe said.
As we told you last month, Kentucky awarded a financial advising contract to a Public Financial Management, based in Orlando, Fla. PFM is being paid $285 per hour up to $1 million over two years to assemble the specialized firms it will take to put together the bridge financing package.
That would include a firm to conduct a investment grade tolling study, revenue projections that would be used by placement agents to sell the bridge debt. Kentucky officials don’t plan to complete an investment grade tolling study, or issue bonds, until 2015, within about a year of when we’re being told both bridges will be completed in December, 2016.
Kentucky’s traffic revenue study is being conducted by London, UK-based Steer Davies Gleave, one of the world’s largest transportation consulting firms, as a PFM sub-consultant.
Those rating agency analysts had questions related to risk to potential future bridge bond buyers of the state defaulting on bridge bond payments, risks that can’t be totally ameliorated.
“Each team had a lot of questions … and all those questions involved risk,”Wolfe said. “They keep their cards close to the vest. But we’re confident of an investment-grade rating.”
Bonds are, broadly speaking, rated as relatively safe ‘investment quality” or “investment grade,” or as non-investment grade, speculative bonds, commonly called “junk bonds.”
There is no deadline for the rating firms, which rate dozens of debt issues each quarter, to announce their ratings, Wolfe said.
Rating agency executives have asked for additional documents including construction contracts, he added.
Those ratings – likely to be multiple ratings for multiple tranches of bonds – will determine how much debt the state has to issue for bridge construction.
The ratings also will determine how expensive it will be for Kentucky to borrow the estimated $860 million for the Downtown Bridge construction and the related changes to the interchange.
For example, if Standard & Poor, Fitch’s or Moody’s analysts see debt servicing issues – too little revenue from tolls, for example – lower bond ratings could add tens of millions of dollars to the cost of the bridges.
In short, the riskier the bond, the more interest, or yield, will be paid over 35 years to attract purchasers.
For example, because rating agencies and pre-Great Recession market forces added to the cost of selling bonds to build KFC Yum! Center, the $349 million raised equals more than $800 million paid out to bond holders before the bonds are fully redeemed.
There were several other Downtown Bridge financing developments including:
• The tolling agreement between Kentucky and Indiana is nearly complete, according to Wolfe. That agreement would set formulas for how a tolling authority would be structured, then revenues divvied up between the states to pay for two bridges – the Downtown Bridge and the East End Bridge – estimated to cost a total of $2.6 billion.
• The Kentucky Transportation Cabinet, in conjunction with Indiana DOT officials, is about to issue a request for proposal related to tolling operations. That RFP will included guidelines to select a toll collection company, as well as a “custodian,” which would process and distribute tolling revenue. According to the draft RFP, which you can see here, one company might be awarded all tolling operations. From the bridges authority website:
First, the states will select a firm to design the roadside and back office computer systems that will facilitate toll collection. Next, an electronic toll collection firm will be selected to provide the hardware necessary to implement tolling. Finally, an operations firm will be selected to run the system and collect tolls when the bridges are open to traffic. The states reserve the right to hire a single firm, or up to three separate firms, to perform these services depending on the proposals received.
• Wolfe said state officials are not counting on money from a new federal infrastructure loan program called the Transportation Infrastructure Finance Innovation Act, or TIFIA. For 2013, TIFIA will have about $1 billion for transportation projects across the United States. The catch is, states can’t apply for TIFIA money until they’re invited to apply, and Kentucky hasn’t been invited.
All that is not stopping Kentucky from starting construction of the downtown bridge starting July 1. (We’ll just have to ride with that one ….)
Toward that end, representatives of bridge general contractor and project manager Walsh briefed the media on what is likely to happen. The downtown bridge is a design-build project, meaning that design work will be on-going along with construction.
However, Wolfe emphasized the type of bridge, called a cable stayed design, has been selected: “We know what the bridge looks like.”
Perhaps the most noticeable immediate work will be the demolition of several structures in Jeffersonville next to Interstate-65 scheduled for May including a McDonalds and a Waffle House, along with the relocation of several homes.
During 2013, work on the Indiana side will focus on the Court Street exit in Jeffersonville, and to the Stansifer Avenue offramps, said Blake Morris, Section 3 project manager.
On the Kentucky side, work will start in the area around Slugger Field on Main Street, said Nick Faul, Section 1 project manager with Walsh.
The work will not interfere with the Forecastle Festival music and arts weekend, scheduled for July on The Great Lawn in the nearby Waterfront Park, officials said.
Initially, about 200 people will be working on the bridges, with that number topping out at 300.
Walsh executives confirmed there’s not way to build a giant piece of infrastructure without inconveniencing commuters.
Traffic, one official noted dryly, “will be worse than it is now.”