Macquarie to invest in Incheon bridge

The Australian investment bank takes a 41% stake in the Incheon Grand Bridge project in a deal made possible only under support from the Korean government.

With its appetite for both Korea and infrastructure raging away, Macquarie Bank yesterday (Thursday) announced that it was investing in the Incheon Grand Bridge project to build the longest bridge in Korea and the fifth largest in the world. The investment will be the bank's largest in Korea and comes a month and a half after it announced it was investing $150 million buying into CJ CableNet, a Korean broadcasting company, and buying Korea Independent Energy, an LNG power generator.

This latest deal will see Macquarie buy a 41% stake in the existing project company called Korea Development Company (Koda) for a total consideration of Wn67.5 billion ($64 million). The other shareholders of Koda are Kookmin Bank, IBK, AMEC and Incheon Metropolitan City.

The bank has also agreed to provide debt finance for the project totaling Wn277 billion ($266 million). This comprises a 19-year senior debt portion for almost 65% of the total project costs and a 21-year sub debt portion for 17% of the total. The remaining 19% of the total project cost is coming from the equity portion. Syndication of both debt tranches is complete.

The project benefits from the Korean government's enlightened mechanisms for attracting infrastructure investments. The project company has signed a concession document with Incheon City that gives it the right to build and operate the bridge until 2039. The project company can charge an agreed toll rate and can increase that toll rate by the rate of the consumer inflation index every year.

The project also benefits from a minimum revenue guarantee from the Korean government, a scheme available to other privately financed infrastructure projects in the country. This revenue guarantee is for 80% of the revenue levels that the project company and the government have agreed in the concession agreement. At the end of each year, should the actual traffic revenue be less than the 80%, then the government will provide a cash subsidy to the project company. In the event that the project company cannot escalate the toll due to the government's request, then the government is to give a subsidy to put the company in the position it would have been in had it escalated the toll.

In most other countries in Asia, such government guarantees would not be worth the paper they are written on. But Korea has made developing its infrastructure a central plank of it latest burst of economic development. Offering such guarantees and then actually sticking to them (as it has done in the toll road linking Incheon and Seoul), is crucial in attracting international capital. Other countries that are desperate to develop their infrastructure should take note. The size of investment and quality of investors in such Korean deals, is unmatched anywhere else in the region and that is entirely due to the regulatory framework that supports the sector.

Macquarie suggests that it could transfer this bridge asset into one of its existing infrastructure funds, or sell it directly to institutional investors within the next six months. The bank is also understood to be in the final stages of preparing for the listing of another Korean asset called the Korean Road Infrastructure Fund (KRIF) and is seeking shareholder approval for the sale. Logically one would assume that it would fit nicely into KRIF.

The bridge itself will be just over 12kms long and will link the gleaming, newish Incheon Airport with the Incheon Free Economic Zone, as well as linking in to southern Seoul. Construction of the bridge has commenced and will be complete by October 2009.