26 August 2010
The recent bankruptcy filings by infrastructure companies Connector 2000 Association Inc., South Bay Expressway, L.P., California Transportation Ventures, Inc., and the Las Vegas Monorail Company have tested the structures utilized to implement public-private partnerships (P3s) in the United States in several respects. It is still too early to draw definitive conclusions about the impact of these proceedings on P3 structures going forward, but initial rulings in two of the cases are already focusing the minds of project participants on threshold structuring considerations.
In the Las Vegas Monorail case, the Bankruptcy Court for the District of Nevada handed down two important decisions on April 26, 2010. In the first, it held that the debtor, a not-for-profit corporation, was eligible for relief under Chapter 11 of the Bankruptcy Code. This ruling is significant because the filing had been challenged by Ambac, the insurer of the debtor’s secured tax-exempt bonds, on the grounds that the debtor is a government instrumentality that could only file for bankruptcy under Chapter 9 of the Code, governing municipalities.
Nevada state law does not specifically authorize entities like the debtor to file under Chapter 9, however, so adopting Ambac’s argument would have effectively prevented the debtor from obtaining bankruptcy protection. Judge Markell wrote that while Ambac’s argument did have “some merit,” the “low level of state control” of the company means that it was not a municipality within the meaning of the relevant Code provisions. (Connector 2000 Association Inc., a similar entity, recently filed in South Carolina for bankruptcy protection under Chapter 9, under which post-petition revenues securing revenue bonds remain subject to the bondholders’ lien notwithstanding the Code’s general prohibition of liens on after-acquired property, but subject to the project’s necessary operating expenses.)
In a second decision in the case, Judge Markell ruled that the trustee for the Las Vegas Monorail Company’s bondholders was not entitled to adequate protection in respect of its asserted lien on the company’s revenues: under the bond documents the trustee’s lien attaches to such revenues only after payment of operating expenses. Additionally, the court ruled that these revenues were not proceeds of the Las Vegas Monorail Company’s right to operate the monorail under its franchise agreement. The court implied that any payments required to be made by Clark County, the franchisor, under the agreement would have constituted proceeds (thus, “availability payments” required to be made by concession grantors under a different structure would seem to qualify as proceeds of the concession agreement). The court also suggested that even a lien on the track or rolling stock, which the bond trustee did not have, might have supported such a characterization of the company’s revenues.
In the South Bay Expressway case, the Bankruptcy Court for the Southern District of California granted summary judgment on July 28, 2010, validating mechanic's liens asserted against State Route 125 by the project’s construction contractor, despite public ownership of the project subject to concessions from debtors South Bay Expressway, L.P., and California 4 Transportation Ventures, Inc. These liens, which secure claims, including substantial cost overruns, and which prime the liens of the project’s secured lenders, precipitated the bankruptcy filing.
These early bankruptcy rulings underline the need for prompt and close attention to structuring considerations in P3 financings. In this regard, it is important to understand the bankruptcy status of the debtor, the differing ramifications of traffic risk versus availability payment structures, the implications of gaps in the collateral package and the possible impact of mechanics’ liens securing cost overruns.
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