Golden toll roads drive MacBank

January 10, 2008

Michael West / The Australian (Sydney, Australia)

"Cost of M6 motorway toll soars by 50 per cent", blared the headline in yesterday's edition of The Telegraph in Britain.

Shares in Macquarie Infrastructure Group (MIG), which owns the road, went up despite the down day. Higher tolls equals good news.

"MPs are considering an investigation into Britain's only privately owned motorway after the cost of driving rocketed ..." -- as MPs do, according to press reports, every time there's a toll hike.

Too bad. The contracts are tight as a drum. The M6, the Toronto 407 and the San Diego 125, all controlled by Macquarie, are the best toll road assets in the world. And, not coincidentally, the only unregulated ones.

The real issues worth considering are twofold. For the consumer, are infrastructure costs going up across the board? Airports, toll-roads, power generation, communications towers, and the likes of childcare and aged care assets? The list goes on.

Thankfully for local motorists, the tolls are linked to CPI and average weekly earnings.

For the financiers, the picture is mixed. Thanks to the credit squeeze and deteriorating markets it would seem the jig is up for aggressive refinancings, revaluations, and other assorted "events" employed by the "Macquarie model" to rip out a fee. "Deal velocity", moreover, is on the wane.

There will be some pressure on prices for consumers. And there will be pressure on earnings for the likes of Macquarie and Babcock. But it's not all bad news for the money engineers. Macquarie now banks $1 billion a year from its base fees alone. It -- the group, not its satellites, that is -- is best placed among all its proteges.

As for growth, the money still pours into the pension funds -- and these funds, leery of shares and bonds (especially exotics), are pouring it into infrastructure. On Tuesday night, Macquarie slapped $18 billion in equity into two funds alone -- its European Infrastructure Fund (3) and a US fund.

But while the inflows are there, an ominous move by New Jersey Governor John Corzine wiped a little bit of blue sky out of the model this week when he took the rather socialist tack (for a former Goldman Sachs chairman) of spurning a couple of large road privatisation deals.

Some $US50 billion worth of roads in the New Jersey Turnpike and the Golden State Parkway, pronounced Corzine, would now be retained by the state. The state would raise the requisite debt against the assets on the basis that it would levy the same debt as the private bidders had proposed.

Ironically for the infrastructure players, though governments will now have to cop a lower price for their asset sales, the financiers can still get the same kind of return on equity. The credit crisis has meant the financiers won't pay governments as much for their assets as their gearing will be lower.

This would be dawning on the NSW Government now, with its proposal in-swing to sell $15 billion worth of electricity power stations.

As for the fall-out from the credit crisis, shares in the top financial engineers, Macquarie and Babcock, have held up well, perhaps a little too well in light of the clear pressure on costs and falling deal-rates. Their satellites, where there is more debt and more risk, have had a far rougher time. The second-tier players though have been caned; Allco thumped to a new low again, MFS foundering a tad, Centro unspeakable. There will be more pain to come. Look for stocks with less governance, less visibility, and lots of debt.