Proximo Weekly: Turbulence at LAX
The bonds backing the LAX people mover project have been put on negative ratings watch by Fitch. All is not well at the US P3 flagship project.
Fitch has put $1.2 billion of BBB- rated private activity bonds (PABs) raised in 2018 for the people mover project at Los Angeles International Airport (LAX) on negative ratings watch. Given the deal was LAX’s first P3 procurement, and the scale of the transaction, the Fitch move does not bode well for developing a more consistent pipeline of US P3 projects – an ambition that earlier in the year got a contrasting positive nudge from MTA’s P3 debut.
The $2.72 billion people mover project was awarded to project company LAX Integrated Express Solutions (LINXS) – a joint venture of Fluor (27%), Balfour Beatty (27%), ACS (18%), Hochtief (18%), and Bombardier (10%). The project company holds a 30-year design-build-finance-operate-maintain concession for the 3.62km elevated dual guideway, nine-train system.
The bonds mature in series to 2048, and each series typically carries a coupon of 5%. The bonds brought in $1.285 billion, while the sponsors put up $103 million in equity and CIBC, Mizuho, SMBC, Korea Development Bank and Toronto-Dominion Bank put up a $270 million construction period loan.
The project’s revenue is underpinned by Los Angeles World Airports (LAWA) – a self-funding enterprise owned by the city of Los Angeles – which is providing $1 billion in milestone payments in six equal instalments and future availability payments.
The rationale behind the Fitch ratings move is the notice of developer default issued by LAWA to LINXS on 21 July 2023 – arguably a spat symptomatic of the complexity of such a large construction project, but nevertheless an additional bit of tarnish on P3 as a procurement method.
LINXS has contested the alleged default and is working with LAWA to withdraw the notice, but Fitch believes the issuance of the notice is symptomatic of a strained relationship between the parties and introduces uncertainty over project completion given concession termination is one of the remedies available to LAWA if the developer default is not cured within 30 days.
According to Fitch, “in its July 2023 notice of developer default to LINXS, LAWA highlighted that LINXS abandoned performance of the additional roadway work that falls within LINXS' base scope of work. LAWA noted this action constitutes a developer default and LAWA has recourse to remedies including to the performance security and ultimately, termination of the concession. LAWA also expressed it does not bear the responsibility for delays or extra work costs incurred by LINXS due to delays in securing applicable government approvals in a timely manner. Further, LAWA noted the concession agreement provides it with the right to direct LINXS to perform disputed work. LAWA expressed that LINXS's argument that the roadways are outside of the design and construction limits is inconsistent with the contract documents as well as LINXS's performance of work till date.
“LINXS' response claims the default notice is invalid due to LAWA's failure to provide notice to the collateral agent per the DBFOM agreement, including sufficient detail allowing the collateral agent to quantify LINXS's liability due to default. LINXS stated this invalidates the commencement of the 30-day cure period, which would have begun on the date of the notice's issuance (July 21, 2023). LINXS also claimed it has not abandoned any part of the project and remains committed to successful delivery of the project.”
Both parties are said to be working to resolve the dispute and Fitch will remove the ratings from rating watch negative if the notice is withdrawn by LAWA and there is certainty the project will not face financial pressure due to extended completion delays. Were such a high-profile airport P3 to hit the buffers, confidence in P3 as a procurement method in the US could take another major hit.
Selected news articles from Proximo last week
NORTH AMERICA
BP and Equinor renegotiating US offshore wind PPAs
BP and Equinor are in the process of renegotiating the PPAs for their joint offshore wind projects in the USA, according to Reuters.
EUROPE
Further details on GRIDSERVE EV charging financing
GRIDSERVE has reached financial close on a £526 million project financing for a UK EV charging portfolio.
ASIA-PACIFIC
Singapore launches RfP for 600MW CCGT project
Singapore’s Energy Market Authority (EMA) has launched a Request for Proposal (RFP) for a 600MW Combined Cycle Gas-Turbine (CCGT) project.
MIDDLE EAST & AFRICA
Trafigura 'seeks extra funds as Congo project costs over run'
Trafigura has been forced to seek new funding for its $600 million copper-cobalt project in the Democratic Republic of Congo as the project has overshot its budget.
SOUTH AMERICA
Peru awards Piura Nueva-Frontera transmission PPP
Peru’s Agency for the Promotion of Private Investment (PROINVERSION) has awarded the Piura Nueva Substation - Frontera transmission project to Celeo Redes.
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