The Cheap Pennsylvania Turnpike

What kind of effect has the credit crunch had on the formerly-frothy market for infrastructure investments? As money becomes scarcer, the price tags attached to future-cashflow investments like toll roads would normally go down. But there was always another possibility: that infrastructure, which is one of a very small number of fixed-income investments which doesn't involve credit risk, would survive the credit crunch unscathed and even maybe get a new flight-from-credit bid.

Judging from the results of the auction for the Pennsylvania Turnpike, it's more the former than the latter. Yes, infrastructure funds are flavor of the month right now, but the newly-oversubscribed funds seem to be keeping a very disciplined hand on the amount they're bidding. The top bid for the Turnpike was disappointing:

The final offer of $12.8 billion still on the low end of what Morgan Stanley valued it when it was hired as an adviser to the state of Pennsylvania. It estimated the turnpike's worth at $12 billion to $18 billion. And just a year ago, sources told BusinessWeek the turnpike could fetch as much as $30 billion.

I'm not surprised. Infrastructure funds are equity funds, which means that every dollar invested in them is loaded up with (typically) three dollars of debt. That debt, which is extended by banks, does carry credit risk, and is much more expensive now than it was at the height of the credit-market bubble.

And what happened to the reportedly frothy market where "at public auctions for infrastructure assets 20 to 30 bidders typically show up," as Ryan Orr said in a comment here on an earlier blog entry of mine? The number of bidders for the Pennsylvania Turnpike was just three: a Macquarie-led group bidding $8.1 billion; a Goldman-led group bidding $12.1 billion; and the winning bid from Citi and Abertis of $12.8 billion.

The Turnpike hasn't been sold yet: the Pennsylvania legislature now needs to ratify the deal, and there's no particular reason to think it will do so, at this price. In general, I think that selling off toll roads and the like is a very good idea. But selling off an asset for less than it's worth is not. The problem in this case is that although a colorable case can be made that it might be possible to get substantially more money for the Turnpike in the future, Pennsylvania can't wait that long: if it doesn't privatize the Turnpike now, it's going to implement some extremely unpopular tolls on I-80.

From the point of view of Pennsylvania's legislators, this might be a bad deal - but tolling I-80 is even more politically unacceptable. Maybe that was the bidders' calculation: that they had a unique opportunity to buy a prime infrastructure asset at a low price, and they'd happily run the risk of losing the auction in order to get the increased returns from a low bid.