Bonds

Baltimore bridge collapse shows need for engineers and muni market to partner for resilient infrastructure

The late March collapse of Baltimore’s Francis Scott Key Bridge raises questions about the age and resiliency of U.S. infrastructure that engineers and the finance industry will need to address together.

That’s the view of Maria Lehman, immediate past president of the American Society of Civil Engineers, GHD’s infrastructure market leader for the United States and former interim director of the New York Thruway Authority.

The March 26 bridge collapse was caused by a collision from a massive container ship, not an extreme weather event. But the incident, which was followed by a chunk of California’s Highway 1 falling into the Pacific Ocean, highlights the vulnerability of America’s aging infrastructure, Lehman said.

American Society of Civil Engineers

“We have to look more critically in the engineering and financial industry on what the impacts are based on old infrastructure that’s not up to current standards,” Lehman said. “If you’re doing 30-year bonds, you better have high probability [the asset] is going to be good for 30 years,” she said. “With all the changes we’re seeing, we’re going to have much more collaboration between the engineering and the financial industry.”

The ASCE in its most recent report card gave American bridges a C grade, warning that 42% of all bridges are at least 50 years old, and 46,154, or 7.5%, are considered structurally deficient, meaning they are in “poor” condition.

As extreme weather events become more common, Lehman said upfront design decisions and standards will become more important to the cities and states building the assets, the market participants financing them, and the engineers designing them.

The ASCE is considering convening a conference this summer to bring together the infrastructure finance industry with engineers “to make sure that what we’re building protects the investors and the public at the same time,” she said.

The first credit fallout from the bridge collapse came Tuesday when Moody’s Investors Service revised its outlook on the Maryland Transportation Authority, which owns and operates the span, to negative from stable. Moody’s affirmed its Aa2 rating on the MDTA’s $2.2 billion of debt.

The negative outlook “reflects the uncertainty around the Key Bridge’s replacement project’s costs, including their funding, and timing coupled with financial metrics that were expected to narrow before bridge collapse, as MDTA moves forward with its capital improvement program,” Moody’s said. Prolonged uncertainty about the replacement or a replacement that weakens financial mechanisms further could lead to a downgrade, Moody’s said.

An asset’s condition and resiliency is important to bond analysts, said Jeff Devine, vice president and municipal bond research analyst at GW&K Investment Management, which owns MDTA bonds.

“It’s something we talk about and keep an eye on it terms of the credit process, and to the extent we see additional reinforcements or other enhancements in the face of climate change or other risks, it bodes well for these infrastructure agencies,” Devine said.

Devine noted that the FSK bridge was inspected between October 2022 and May 2023 and found to be in “good repair, working order and condition,” according to bond documents posted in February, when the MDTA last came to market.

“It’s really hard to predict an event like this and it’s important when these exogenous shocks happen to be comfortable with the existing financial operations of a particular credit,” he said. “We thought very strongly of the liquidity position, of the other financial metrics like the debt service coverage, and then also of the insurance that will presumably help in terms of getting the bridge up and going.”

Devine noted that FSK’s tolls accounted for only 7.4% of the MDTA’s total toll revenue, and that debt service coverage levels without the asset dropped from 4 times but remained at a still-healthy 3.6 times.

The essentiality of the bridge is underscored by President Joe Biden’s pledge to use federal funds to fully cover all rebuilding costs, Devine said.

Maryland’s congressional delegation said this week they would introduce a bill ensuring what Sen. Bill Cardin, D-Md., called “100% a federal responsibility,” a pledge that’s sparked some pushback from Republicans.

Gov. Wes Moore, a Democrat, said Thursday on Bloomberg television that “all options are on the table,” including municipal bonds and public-private partnerships. “I understand the role that the public and private sector and that philanthropy will also play in this,” Moore said, adding that he does not yet have a price tag on the bridge replacement.

Lehman, who was interim director of the New York Thruway Authority when it began construction on the $4 billion Tappan Zee bridge replacement and before that was the public works commissioner for Erie County, N.Y., said issuers will need to make the tough call of spending more up front to build more resilient infrastructure.

“There’s always a fight to bring those costs down as low as possible,” she said. “The financial and engineering industries need to align to get the owners to do what it is they need to do to make sure it’s a durable asset. You’re going to pay now or pay later.”

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