Macquarie model has one foot in the grave, the other foot on a banana skin

August 1, 2008

Michael West - The Sydney Morning Herald

IF THE Macquarie model is not dead, it is surely comatose and dangling upside-down with its claws superglued to the perch.

Despite touting a glamorous 14% yield, the latest stapled infrastructure float, BrisConnections, has tanked 60% on its sharemarket debut.

The main reason is that people have twigged to the financial engineer's lurk of the manufactured yield. That is, they now understand they are simply being given back their own money after the Macquarie machine had slapped the structure together, raised debt with their equity and stripped out the fees.

This one is an embarrassment for the Queensland Government and the state's largest fund, QIC, which is a major shareholder. However, the Government could boast, at a stretch, that it has got its financing for the $5 billion Airport Link project and that the fate of BrisCon and its shareholders is incidentally a matter for the private sector.

After all, retail investors are said to account for only 12% of the issue. Much of the rest is lumped with the underwriters, Credit Suisse, JPMorgan, Deutsche Bank and assorted Macquarie vehicles. Especially the latter.

It's a tad hard to tell from the cluster of nominee companies on the BrisCon top 20 shareholders list, but it appears Macquarie in-house entities account for 26%, or one-quarter of the $400 million issue.

The two tranches to come will make BrisCon a $1.2 billion issue but there is a prospect that, unless the stock bounces, investors will be reluctant to throw good money after bad. If market conditions deteriorate further it could even go to zero with $2 still to pay.

"The BrisConnections IPO was fully subscribed with the offer well supported by leading domestic and international institutional investors," said the press release. No it wasn't. A monumental overhang of perhaps half the float is sitting there waiting to spill.

A miraculous recovery cannot be ruled out. Since investors are required to pay another $1 in nine months, though, and yet another $1 in 18 months, this one has the ring of the Norwegian blue parrot about it.

Besides the willingness of the promoters to stuff the overhang into their own vehicles, another measure of the brazen resolve it took to get this float away was that, during marketing, big toll-road operator Transurban declared a restructure. It would no longer adhere to the model of paying distributions out of capital, said new chief executive Chris Lynch. It was time to deleverage.

Despite Transurban disavowing the model, Macquarie pressed ahead.

If the Airport Link project were such an attractive investment proposition the bank, having won the tender, would have slotted the asset into Macquarie Infrastructure Group.

Instead this is a structure designed to produce cash today - $110 million in fees - with unit holders in the BrisCon trust taking the risk on the assets tomorrow. Actual cash flow is years away.

As is de rigueur in these offerings, the traffic forecaster charged a king's ransom for its advice. The expert in question, Arup, snips $4.7 million for making estimates without, one can assume, any liability.

To give Macquarie its due, although it has structured most of the toll-road deals in the country, the two that have gone belly up thus far for investors have been Sydney's Cross City and Lane Cove Tunnel projects - both put in place by other financiers.

While the long-term viability of the other projects will not be known for years, the so-called Macquarie model of listed infrastructure stocks is surely pushing up the daisies - notwithstanding the denials at last week's shareholder meeting, and the strong inflows into its unlisted vehicles.

Whether all these projects will be viable in the longer term (BrisCon has a 45-year lease) is highly moot. For one, the model was designed when the oil price was $US25 a barrel and every operator steadfastly refuses to disclose the oil price assumptions in its modelling. As do the Queensland , NSW and Victorian governments.

Surely Andrew McNamara Queensland's Minister for Sustainability, Climate Change and Innovation, and his oil vulnerability taskforce will be wanting to know what his counterparts in government - particularly Deputy Premier and Infrastructure Minister Paul Lucas and Transport Minister John Mickel - have signed off on here. Not to mention Brisbane Lord Mayor Campbell Newman, who is a key proponent.

Given, yesterday was just one day in the listed life of this trust, and the likes of Macquarie Airports also had a rough beginning with many a sceptic lambasting the group for paying too much money to buy Sydney Airport.

However, the sheer overhang in BrisCon bodes poorly for the stock in this environment of distaste for complexity, leverage, high oil prices and bear-market sentiment.

There is potential for renewable energy to fuel cars and keep toll roads ticking over, but evidence has recently emerged that the cost of petrol is not "inelastic", as they say, to demand for motoring.

The traffic numbers for MIG's assets such as the French APPR and Toronto's 407 have been flat, even in some cases declining.

Until now, Queensland had a superior track record in PPPs to the southern states but now it is catching up, or is that down? The Government has declined to reveal its public sector comparator (PSC) - a study that looks at various options to fund infrastructure - if indeed it did one.

Meanwhile the other toll-road in Brisbane, Rivercity Motorway, is travelling at 30¢, down 70% on its $1 issue price, albeit before investors have taken their distributions from capital along the way.

This week's revelations that the NSW Government had been given strong advice that its proposed metro rail line to the north of Sydney would be a dud demonstrate further that, when it comes to splashing around taxpayers' money, appropriate disclosure and transparency are in order.

For a start, governments should bring back the PSC test. It should be made public so the public can debate the merits of financing options.