Gordie Howe tackles bi-national challenges
Financial close for the Gordie Howe International Bridge represented a unique milestone for both Canadian and US P3s. The deal’s success followed many years of challenges. By Alison Healey.
The Gordie Howe International Bridge project encompasses the construction of a six-lane, 2.5km bridge, a dedicated path for pedestrians and cyclists, approach roads and connecting ramps to the freeway systems in Ontario and Michigan and Canadian and US Ports of Entry.
The Canadian Port of Entry is a 130-acre complex, making it the largest Canadian port along its border with the US. The 167-acre US Port of Entry will be one of the largest in North America. Both include inbound and outbound inspection facilities, commercial exit control booths and parking.
The project also includes the implementation of a tolling system and the completion of the Michigan Interchange, which will create a streamlined highway corridor from the existing Rt Hon Herb Gray Parkway in Windsor to the I-75 in Detroit.
The project was procured by the Windsor-Detroit Bridge Authority (WDBA), a not-for-profit Canadian Crown corporation that reports to the Canadian parliament through the Minister of Infrastructure and Communities.
It was created in 2012 to procure the project, which involves the design, build, finance, operation and maintenance of the new cable-stayed bridge that will cross the Detroit River connecting Windsor, Canada and Detroit, Michigan. A cable-stayed design was selected over a suspension bridge for several reasons including cost effectiveness.
The project was initially known as Detroit River International Crossing (DRIC) and was later known as the New International Trade Crossing (NITC). In 2015, then-Canadian Prime Minister Stephen Harper said the project would be renamed after Gordie Howe, the late hockey player who was born in Canada but played many of his years in the National Hockey League (NHL) with the Detroit Red Wings. He died in 2016.
WDBA, which has overall responsibility for overseeing the scheme, including setting and collecting the toll, launched the procurement process in July 2015 with a request for qualifications (RFQ). A total of six teams responded to the RFQ but the identities of all six teams were not disclosed. In November 2016, the WDBA issued a request for proposals (RFP) to three shortlisted teams as part of the process to select a private-sector partner.
The shortlisted teams included Bridging North America, with ACS, Fluor, Aecom, Aecon, RBC, Carlos Fernandez Casado S.L/FHECOR Ingenieros Consultores, Moriyama and Teshima Architects, Smith-Miller + Hawkinson Architects;, CanAm Gateway Partners, with Fengate Capital, BBGI CanHoldco, EllisDon Capital, Bechtel, Arup-Hatch Mott McDonald Design JV, Bergmann Associates, NORR, Traylor Bros, Egis Projects, and Roy Jorgensen Associates; and Legacy Link Partners, with SNC Lavalin Capital, VINCI, John Laing, HDR, Leonhardt, Andra and Partners, Aas-Jakobsen, Alfred Benesch & Company, Golder, American Bridge Canada Company, Barton Malow, DRICCA.
Aecon dropped out of the bidding for the project as part of the Bridging North America consortium but later rejoined. The dropout came as the company received a takeover offer from China’s CCCC International and national security concerns were raised. The acquisition by CCCC was later blocked by the Canadian government.
In July 2018, the WDBA selected the Bridging North America team as the preferred proponent on the Gordie Howe Bridge P3.
ACS and Fluor had worked together before on a major Canadian P3 as part of the Windsor Essex Mobility Group. The consortium constructed the C$1.1bn Herb Gray Parkway, which opened to traffic in June 2015.
Evaluating the bidders for the P3 required the project sponsor, Windsor-Detroit Bridge Authority (WDBA), to adopt an innovative FX benchmarking approach, according to JCRA, the independent financial risk advisory firm that advised the Windsor Detroit Bridge Authority on the project and assisted in drafting the RFP.
“Given the cross-border nature of the project, bidders needed to take into consideration costs incurred in both Canadian and US dollars,” JCRA said.
“The foreign exchange issues raised in the project financing were without precedent in the Canadian P3 market and there was no model to follow. However, JCRA supported Deloitte’s view that the foreign exchange risk could be managed in a similar way to any other financial instrument used in a P3 scheme as the preferred proponent could execute foreign exchange forwards and/or options during the construction period.”
JCRA also benchmarked the bank lending and capital markets portions of the proponents’ financial submissions, as well as the preferred proponent’s hedges as of financial close. This exercise included monitoring the credit-spread adjustment from financial submission through to financial close.
“We made sure WDBA could be confident that the shortlisted proponents were compared fairly with regard to the capital markets elements of their respective financial submissions and, post-best and final offer, the preferred proponent was held to their pricing and spreads through financial close,” says Brian Phelan, director at JCRA.
The contract value for Gordie Howe ultimately came in at C$5.7bn. Costs increased several times over the past several years as the project’s planners fought off challenges from extensive litigation, largely from Matty Moroun, the owner of the competing Ambassador Bridge.
It was also delayed as bidders asked for more time to complete responses to the RFP based on the project’s complexity and due to land acquisition difficulties on the Detroit side.
The “outcome-based” contract calls for a 125-year lifespan of the bridge and includes several protections and risk distribution, according to the WDBA.
The Canadian government is subsidising 80% of the cost through monthly progress payments, which is intended to be an incentive for the construction companies to meet deadlines and quality requirements.
The fixed-price DBFOM contract includes milestone payments for progress along the design and construction timeline, and a completion fee, as well as monthly availability payments for operating and maintaining the project over the 30-year concession period.
The contract sets out C$3.8bn as the final price to design and build the span, with C$1.9bn more to operate and maintain the bridge and its ports of entry on both sides of the border for 30 years.
The project reached financial close on September 28 and construction is expected to take six years.
The payment mechanism comprises C$2.7bn in monthly construction period payments, available only once 15% of the capital costs have been privately financed, along with a C$481m substantial completion payment, sized such that the post-construction long-term private financing remaining is at least 15% of the project capital costs.
The private financing component includes C$163.5m of 3.644% Series A senior secured notes and C$291m of 4.058% Series B senior secured notes as well as a short-term construction facility of C$587m. HSBC and RBC led the bond offering and the construction loan. Caisse Desjardins du Quebec, TD, and Mizuho also served in lead roles on the loan component of the deal.
The private partner will contribute C$93m of equity at the end of the construction period, secured by letters of credit until that time.
The transaction surmounted a series of unique challenges including its bi-national component, which dictated that all codes, regulations and standards be met on both sides of the border.
Additional specific challenges included foreign exchange risk. During construction all public payments and private financing are in Canadian dollars while costs are incurred in both currencies. The private consortium implemented a forex hedging and also worked with WDBA to have a portion of the availability payments paid in US dollars to provide a natural mitigation of the risk.
One unique risk to the deal relates to WDBA’s status as a start-up entity that would not have its own source of revenues to support its payment obligation to the project company during construction and operation, according to Dhaval Shah, director, global infrastructure ratings, at S&P Global Ratings, which rated the financing A-.
WDBA will earn toll revenues during the operation period, Shah said, but it remains to be seen if it would earn sufficient toll revenues to support availability payments.
In order to address this risk, the Government of Canada is supporting the payment obligations of WDBA. The government is providing a funding agreement that commits to provide funds that enable the WDBA to discharge its payment obligations to the project entity.
“In our view, the government’s commitment under the funding agreement falls short of the requirements of our guarantee criteria,” Shah said. “However, we believe it strengthens the link between WDBA and the government and therefore, we were comfortable with the credit quality of WDBA as material counterparty to the project.”
The project will repay the senior bonds over the operation period from availability payments, sized to achieve a minimum debt service coverage ratio (DSCR) of 1.18x, S&P said.
The project faced additional hurdles as it was preparing for financing as tax reform was being enacted in the US. Expected tax changes, the likelihood of tariffs, and the negotiation of a new trade agreement between the US and Canada had to be addressed in BNA’s bid.
The scale and complexity of the project, along with its international border location and the tailored approach required to deal with certain risks unique to each side, required close collaboration with the WDBA to negotiate a risk profile that satisfied the lending community and may form the basis of future cross-border transactions. Examples include differences in environmental liability and the land acquisition process between countries.
Other unique features of the deal include that the security package of the design-build joint venture featured a unique step-up mechanism for the required amount of liquid security as well as a parent company guarantee step-down mechanism whereby the limit of liability may decrease as certain milestones are achieved. The features served to further optimise the design-build price.
In October, Canadian Prime Minister Justin Trudeau and Michigan Governor Rick Snyder, as well as representatives of the WDBA and Bridging North America, attended the official construction start of the Gordie Howe International Bridge project that will cross the Detroit River to link Windsor in Canada to Detroit in the US.
The project is expected to provide significant capacity improvements in the Windsor-Detroit corridor, which is currently used by 2.6m trucks transporting more than US$130bn worth of goods annually. It is expected to open to its first traffic by the end of 2024.