South Bay Expressway company files for bankruptcy in San Diego

South Bay Expressway (SBE) company filed for a reorganization in Chapter 11 US bankruptcy this week, writing off around $200m in shareholder equity. The equity held by Macquarie Atlas Roads in Australia and previously Macquarie Infrastructure Group had been heavily written down since the pike opened in November 2007 and was valued at zero ($0.00) in the financial reports from June 2009 onward.

The project was the first by Macquarie in the United States and the first tollroad to get a USDOT TIFIA loan.

The tollroad is located in the west coast's "Subprime Central" zone or mortgage walkaway country on the eastern fringe of suburban development. A boom area for a couple of decades everything stopped just as the road opened.

And with its connection to the Otay Mesa border crossing it was also hit by the drop off in US-Mexico trade.

The project has also been afflicted by major ongoing litigation over huge claims made by Fluor/URS, the contractors who built the road but spent over a year longer than contracted at the job.

South Bay Expressway (SBE) have spent $40m in legal fees defending against the builders' claims which at one point totaled $740m.

SBE are proposing to the US Banktuptcy Court that it address both the reorganization and write-off of debt and the Fluor/URS litigation claims, which are cited as a major reason for the Chapter 11 filing. Fluor/URS began a foreclosure claiming a first priority "mechanics lien" over other creditors. This has to be resolved first, SBE asserts.

Service as usual promised

But an emailing to FasTrak transponder account customers this morning assures them they will see "no change in service" on the road.

The message from CEO Greg Hulsizer says: "Like many other local South Bay residents and business owners restructuring their loans, we’re doing the same as a proactive measure. Moving in this direction will allow us to reorganize our business and restructure our debt in a timely manner; making SBX better able to meet the needs of customers and other stakeholders. We’re here for 35 years and our goal is continuing to provide first-class service and save our customers time and money."

Hulsizer tells us toll revenues and the bankruptcy plan leave them with sufficient to pay their staff of 50 who do operations and the contractors who sweep the road and mow grass. They're continuing a toll system upgrade and this week will be the first tollroad in California to do "pay-by-plate" - license plate billing.

75% of tolls are by transponder.

Only two toll lanes of 16 on the 15km (9.3 mile) 2+2 lane tollroad are staffed, all the ramp lanes being FasTrak transponder or coin machine (with credit/debit card swipe to be added soon).

A 48-page filing with US Bankruptcy Court by chief financial officer Anthony G Evans lays out details of the tollroad's predicament.

"In light of the substantial and ongoing litigation costs and current and expected market conditions—including a still-weakened housing market and lack of new development, which have inhibited both population and employment growth in the corridor surrounding the Expressway— (SBE) commenced these chapter 11 proceedings in order to restructure their financial obligations and de-lever their balance sheet. In connection therewith, (SBE) have engaged in discussions with their key stakeholders.

"Unfortunately, due to a lack of resources to fund upcoming litigation and arbitration hearings (let alone pay any judgments that might be entered against SBE) and an inability to resolve the proceedings prior to seeking chapter 11 relief, (SBE) will use the chapter 11 process to address the litigation, restructure their obligations, and de-lever their balance sheet.

"(SBE) have been and will continue to work with their key stakeholders to develop, negotiate, and implement, to the extent possible, a fully consensual restructuring to the benefit of the public for the remaining term of the Franchise Agreement, which
currently extends to 2042."

At stake are $340m in senior loans maturing Nov 2021 and $170m in USDOT TIFIA loans plus interest rate swaps. As of time of filing SBE says it has $640m of assets by book value and $570m of liabilities.

Revenues in the year to mid-2009 were $21m for EBITDA of $3m with 53 on  payroll. Debt service is presently $19m/year.

The toller operates under a 35 year toll franchise or concession won by a Parsons Brinckerhoff  (PB) company California Transportation Ventrues (CTV) from Caltrans the state DOT going back to January 1991. PB developed the project known then as California State Route 125 South through a tortuous 12 years of project planning and permitting and fights over routing and environmental issues. It also competed construction bids and selected the contractor Fluor/Washington Group-now-URS.

Macquarie bought PB out of SBE just as construction was ready to start with the contractors selected with a $340 design-build contract doing the financial close in 2003. Wilbur Smith had done the investment grade traffic and revenue forecasts.

CORRECTION: We initially wrote that the concession term had been extended to 45 years in return for extra capital and agreement to allow greater competition on parallel I-805. Legislation was passed by California's legislature to enable this, but it was never used. The concession term remains the original 35 years. (2010-03-24 11:00)

Construction took a third longer than contracted

Construction was by contract due to be completed in Oct 2006, 41 months from May 2003. But it took 13 months extra, or 54 months to open in Nov 2007.  

Tolling couldn't begin until mid-January 2008.

The work was complicated by the bracketing of an untolled 3.5km (2.2 miles) Connector Interchange (with SR54) and Gap expressway project at the northern end for Caltrans with the 15km (9.3 mile) SBE tollroad to the south.

Major construction challenge was the big bridge of the project - a 1200m (3/4 mile) long eleven span bridge on a double row of columns going to a height of 55m (180ft) over the Otay River. (The height was needed to limit highway grades on the approaches - no ocean-going ships though they'd fit!)

Curving throughout its length and built of 644 precast segments up to 70 tons each the post-tensioned structure was an intricate work that seems to have proven more difficult and expensive than envisaged.

There were complex 'community development projects' such as hiking, bicycle and equestrian  trails and an athletics complex worth $18m and nearly $20m of 'environmental mitigation' as part of the deals done to overcome opposition to the project from local groups and federal regulators (EPA).

The bankruptcy filing says that 120 claims for extra payment by Fluor/URS range between around $100k and $100m and total about $740m though an arbitration panel has reduced this to $408m. The arbitration ruling of $408m has been taken by Fluor/URS to a higher court.

Claims and counter-claims allege failures on both sides to abide by contract requirements. Many of the claims relate to the smaller untold Gap/Connector project of Caltrans conducted by SBE at the northern end. "Third parties" (Caltrans and local jurisdictions apparently) are blamed for many of the changes in the scope of work.

There has been a separate disagreement between SBE and InTranS the toll system supplier and maintainer. The installation involves 2+2 highway speed open road toll lanes through the middle of the mainline plaza plus single cash lanes and five sets of ramp tolls.

SBE blame InTranS for delays in getting the toll system functional that cost more than $6m in revenue.  InTranS in turn has filed its own "mechanics lien" against SBE asserting priority over other lenders.

The filing says SBE and lenders say the contractors claims are unfounded and intend to vigorously contest them.

T&R

On traffic and revenue SBE say in their court filing that in 2007 as the tollroad neared completion foreclosures were up 2.5 fold in the county. Real estate values dropped 45 to 55% with the housing collapse between 2005 and 2009.  Cross border traffic with a high percentage of trucks at the southern  end of the tollroad has dropped 30%.

Unemployment went from under 4% to over 10%.

Feeling pinched many people drove less and stuck to free routes.

Traffic and revenue forecasts underlying the financing plan for the SBE projected 60k vehicles/day in 2009 whereas traffic was in fact 23k/day, or 38% of forecast level.

Toll revenue in 2008 was $22m or 70% of the forecast $31m.

In 2009 toll revenue was $21m, about half of the $42m forecast.

They say: "As a result, (SBE) are unable to maintain sufficient liquidity to meet their debt service obligations and are having to use reserves for such obligations."

Attempts to negotiate a settlement outside bankruptcy failed, they say, and the Chapter 11 filing is intended to broiled a "breathing spell".

bankruptcy filing:

http://dm.epiq11.com/Project/default.aspx

SBE:

www.southbayexpressway.com/news

previous TOLLROADSnews reports

http://www.tollroadsnews.com/node/3198

http://www.tollroadsnews.com/node/3025

http://www.tollroadsnews.com/node/2712

http://www.tollroadsnews.com/node/1138

TOLLROADSnews 2010-03-23