High debt levels fund Macquarie's Indiana road deal

Macquarie Infrastructure Group (MIG) will fund its share of the 75-year toll road lease with 80% debt.
Macquarie BankÆs appetite for deals continues apace with the signing last week of a 75-year lease on the Indiana Toll Road worth $3.8 billion. The deal, in conjunction with 50/50 joint venture partner Spanish company, Cintra, is the largest highway privatisation lease signed in the US.

Macquarie is said to be paying for its half of the toll road with A$512 million of equity and the rest, approximately A$2.17 billion, in debt. And with a financial close due on June 30, Macquarie has about six weeks to drum up the cash.

The ability to engineer clever capital structures and tap the fixed-income markets has given Macquarie the upper hand in submitting winning bids for toll road assets around the world.

In February the group paid A$5.54 billion for its share in FranceÆs Autoroutes Paris-Rhin-Rhone, an investment that has a gearing level of about 88%.

Gearing levels of 80% or more on road projects is a new trend for MIG. Its last two acquisitions in the US û the Chicago Skyway in October 2004 and Dulles Greenway in Virginia in September 2005 û were purchased with an equal split in debt and equity.

Analysts say MIGÆs preparedness to put forward winning bids underpinned by large chunks of debt is one reason why the listed fundÆs shares are trading at below net asset value. MIGÆs shares closed at A$3.72 before the Easter break, when the NAV is around A$4.

ôThere is a persistent fear the tin will be rattled for more funds for the next acquisition,ö says one commentator. MIGÆs proportionate share of the bankÆs entire debt book is A$8.5 billion.

But Macquarie itself doesnÆt seem to be too concerned about these market grumblings. Nicholas Moore, who heads MacquarieÆs investment banking division and has overall responsibility for MIG, recently told FinanceAsia that while he ôwould preferö if the fundÆs shares were trading higher, but the market would do as it pleased.

ôWe hope that the share price accurately reflects the underlying value of the businesses,ö he says.

Macquarie prides itself on being able to calculate future cashflows from infrastructure projects and, in most cases, has toll hikes written into its concessions in order to maintain internal rates of return and pay distributions to investors.

The Chicago Skyway, for example, was one of the most expensive toll roads in the US û charging $0.26 per mile û even before Macquarie/Cintra took over the 99-year concession. The terms of the deal allow MIG and Cintra to double tolls over the next 10 years in order to achieve their profit goals.

Moore says the global rise in short-term interest rates isnÆt likely to stunt the bankÆs appetite for debt.

ôThe income from our assets is in most cases linked to inflation so our funds are reasonably protected. As well as that, the interest rates on these assets have been locked in for anywhere between five and 30 years so even if the underlying interest rate environment moves up, the medium cost of finance for our funds remains unchanged.ö

These built-in safety nets mean that Macquarie is unlikely to take the advice of some market commentators and spend the next year digesting assets rather than buying more.

MIG has already met with the Pennsylvania government to discuss the long-term lease of the Mon-Fayette Expressway and Southern Beltway û a deal worth $3 billion.

Moore says the number of transactions the investment bank completes each year is linked to the number of staff it employs. ôLast year our division hired 640 new people around the world which is 640 more people that can bring deals to our table.ö

ôLast year we did A$70 billion worth of transactions across the business which is an enormous number and my hope is that we will do more this year.ö
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