Investment bank seeks to finance $1.5 billion Midtown Tunnel project

For years, Australia's biggest investment bank has been raising billions for airports, tunnels and toll roads throughout North America, Europe and Asia.

Now the Sydney-based bank Macquarie Group Ltd. is seeking to help finance construction of a new Midtown Tunnel, upgrade the Downtown Tunnel between Norfolk and Portsmouth and extend the Martin Luther King Freeway.

Macquarie and its construction-company partner Skanska formed a joint venture called Elizabeth River Crossings, which is negotiating with the Virginia Department of Transportation to finance, build and operate the $1.5 billion project. An interim agreement with VDOT is scheduled to be in place next month.

In presentations to government officials and an independent review panel, Elizabeth River Crossings called attention to Macquarie's success at raising more than $8 billion in recent years for toll-road projects in the United States.

But financial markets have been jolted during the past year by heavy losses and investors' aversion to risk. That's likely to make the job of raising money for the tunnel-and-expressway project more complicated.

"The folks providing debt are being far more cautious," said Michael Garvin, a civil engineer and associate professor at Virginia Tech who has studied construction projects by public-private partnerships. Lining up financial commitments "is going to be a challenge for at least a couple of more years."

The schedule for the tunnel-and-expressway project calls for Elizabeth River Crossings to have a comprehensive agreement with VDOT by early 2011 and to close on financing that spring.

In an evaluation of the Skanska-Macquarie proposal, VDOT determined earlier this year that the two companies are financially qualified and capable of lining up the money to build and maintain the project. But because of uncertainty in financial markets, the report said, "Macquarie's ability and willingness to provide a significant direct investment in the project should be monitored," said the report, issued May 13.

Macquarie, it noted, was initially engaged as a partner in two recent toll-road projects - one in Florida and another in British Columbia - but later withdrew.

"Overall, it is a strong company," said Deborah Brown, VDOT's innovative finance officer and co-author of the report with the department's chief financial officer. Given the environment for financing these types of projects, "we still felt it was wise to continue to monitor their condition."

Paula Chirhart, a Macquarie spokeswoman, noted that the company continued to serve as financial adviser for the Florida and British Columbia projects and remains active in financing infrastructure projects.

"The partners in Elizabeth River Crossings are absolutely committed" to the one proposed for Norfolk and Portsmouth, Chirhart said.

Their plans for financing the tunnel -and-expressway project call for borrowing $1.2 billion, including $600 million of low-cost debt available through a federal loan program established a decade ago by the Transportation Infrastructure Finance and Innovation Act, Chirhart said. The two companies, she said, also expect to raise $525 million of equity.

The equity provided by Macquarie and Skanska would be an important buffer and could generate greater interest from prospective lenders.

"It's no different than what the banks look at when they give you a mortgage," said Garvin of Virginia Tech. "If you put 20 percent down, you don't have to pay private mortgage insurance."

In addition, the companies' plans for using low-cost funds from the Department of Transportation program likely will make the project's other debt more attractive to lenders, he said.

Macquarie, whose operations span 26 countries, escaped the heavy losses from mortgage-backed securities and credit-default swaps that battered many U.S. banks last year. However, its earnings for the fiscal year that ended March 31 fell by more than 50 percent partly because of write-downs in the value of troubled assets on its books and increased provisions for loan losses.

Macquarie is well respected in the world of financing for infrastructure, Garvin said, and "they have some really talented people." But the bank, he said, attracted attention for the prices it was willing to pay for some U.S. toll roads, including the Chicago Skyway. With the recession, the prices paid for some projects came back to haunt the bank because the traffic and toll revenue fell, he noted.

In many cases, Macquarie packaged the toll roads it financed and sold them to independent, publicly traded "satellite" funds that the bank manages, including a Macquarie Infrastructure Group fund. Because of shrinking values at some of the funds, they're unlikely to be sources of financing for the Elizabeth River Crossings project.

While investors in toll roads and other projects are less tolerant of risk than they were two years ago, they still are attracted to dependable, long-term returns, Garvin said. For the Macquarie-Skanska team to line up those investors, it must devise a system of tolls that tunnel-and-expressway users are willing to pay.

"If you've got a good business case and a reliable funding stream, you'll find the financing," he said.

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com