Clouds are brewing over a recent toll highway securitization in the Canadian province of New Brunswick that is threatening to water down supply of government revenue-backed deals in the U.S. and Canada.
A new government, under Premier-elect Bernard Lord, won a majority in the provincial legislature on a platform that included killing tolls in the section of Highway 2 from Moncton to Fredericton.
"This should be lovely for the market," sighed one source at a Canadian bank looking at other government revenue-backed issuance. "It's tough enough already."
Two issues came out of the financing, a C$754 million ($538 million) deal backed by leases paid by the government, and a smaller C$130 million ($90 million) private placement backed by tolls. The bigger deal - rated A-low by Dominion Bond Rating Service and single-A by Standard & Poor's - isn't in question, said sources.
But replacing toll revenues with provincial government funds on the smaller deal will likely make some governments question the point for paying for higher structuring costs on these deals, versus simply offering a general obligation bond.
"The documents provide for a condition like this, where the province rescinds that right [to collect tolls]," said DBRS senior financial analyst Huston Loke. "So the province has to make payments to the project company."
Loke added investors will likely see no risk to their investment, but governments may begin to question bothering with the ABS market at all.
"I think that for the investors' side, it's a positive, in that you're getting some revenue from a guaranteed source," said Loke. "But at the same time it makes [P3 deals] less viable as a source. You're losing all the benefits of sharing risk," he said.
It's not the first time this has happened in Canada. A recent Nova Scotia toll road deal also saw the province pick up part of the tab for motorists, when a new government agreed to lower tolls. "Now the province essentially cuts a check to the operator [for every user]," said Loke.
A recent bid by New York City to securitize state-paid education funding to build new schools is also being questioned, due to concerns about a new state government in Albany changing its mind down the road. However, in that case, the city council was running out of room to finance through general obligation bonds.
"It's a bit like buying a new car on a credit card because you can't get a car loan," said one American analyst about the New York City deal. "You pay more for it, but the result is the same."
Elsewhere in Canada, it's been a slow week, the first after the big Whistler conference, but rumors are brewing about a new credit card conduit, in the C$1 billion ($710 million) range, at Royal Bank. As well, Case Credit has begun a roadshow on a new equipment deal, led by Bank of Montreal's Nesbitt Burns. - TC