Bank downgrades Ferrovial stock over I-24 toll lane bid

An international bank downgraded the stock for Spanish construction firm Ferrovial, a key player in the DriveTN group that won the bid for Tennessee’s I-24 toll lane project, citing “higher risks” associated with a promised payment to the state that dwarfed competitors’ efforts to win the job.

Switzerland-based UBS lowered the company’s stock to “neutral” from “buy” in a new analysis, mainly because the company guaranteed the state nearly $25 billion in payments or “concessions,” most of which are likely to be made in the eight-year construction phase. 

The bank’s initial assessment panned Ferrovial’s deal to build and operate toll lanes from downtown Nashville to a point near Murfreesboro, saying it is likely to produce an equity return of only 7%, an “underwhelming” amount considering the project’s risk. Toll lanes are also to extend along I-440 in Nashville and along I-40 toward Nashville International Airport.

The report says, “Historically Ferrovial has a strong record of value creation in its motorways portfolio.” But a UBS model shows the bid’s total cost is six times more per mile than its existing portfolio for managed lane projects and well above the other bids.

Tennessee Transportation finds no “red flags” in toll-lane bidder despite past problems

The state’s Transportation Modernization Board selected the DriveTN consortium led by Ferrovial based largely on a $9.2 billion construction plan and its payment promise to the state as part of a 50-year deal. Transportation officials said the consortium would pay the state $1.5 billion up front.

Two other bidders offered about $7 billion in payment “concessions,” and a fourth asked for a state subsidy to complete the project.

Despite the wide margin in bids, Tennessee Transportation Commissioner Will Reid said the department found no “red flags” in short-listing the finalists. 

Gov. Bill Lee raved about the DriveTN bid, saying it would help the state pay for other road and bridge projects statewide.

Some lawmakers are not enthused with the proposal, including Democratic Rep. Vincent Dixie of Nashville who believes taxpayers “could be left holding the bag” if DriveTN fails to complete the project. 

Dixie said the discrepancy in the bids and stock downgrade are “a huge red flag.”

“No company of that size is going to make that kind of commitment, knowing there’s a possibility they could lose, not millions, but billions of dollars,” Dixie said. “That’s what intrigues me the most about that bid.”

In the aftermath of the bid approval, which enabled the state to continue negotiating with the consortium, UBS noted “higher risks” in connection with the project because of the large upfront capital expense, as well as the high fixed concession fee and large debt in the project’s initial stage.

The UBS analysis also said increased competitiveness in the bidding for public-private road projects as well as a “potential lack of bid discipline” affects its view of the stock, possibly showing a willingness to inflate its payment to the state to win the bid. 

The bank’s broker added it will wait for more “clarity” on the I-24 project and the outcome of a Ferrovial bid for a comparable I-285 project in Atlanta. The report adds that of the 23 analysts that cover Ferrovial, 13 rate its stock as “strong buy” or “buy,” eight as “hold” and two as “strong sell” or “sell.”

DriveTN is made up of Ferrovial, which is involved in the I-66 Express lane in northern Virginia among other major jobs, its U.S. subsidiary Cintra, a highway management company, Australia-based Transurban, Tikehau Star/Infra/Capital, a French infrastructure investment firm, AECOM, a global engineering infrastructure company, and Webber, an American construction company.