The decision by new Transurban boss Chris Lynch to dramatically slash dividend payments and raise $1 billion in new equity capital from his Canadian friends proves what many know but few have been willing to say — listed infrastructure vehicles in their current form are either dead or in intensive care.
Despite the negative prognosis, Stephen Bartholomeusz in Business Spectator wasn’t quite ready to administer the last rites. Bartho looked like he may have been briefed by MacBank or BNB when he noted that:
The intellectual under-pinnings for the Macquarie model are quite straightforward.
Long-duration infrastructure assets, like tollroads, with concession periods measured in decades and with CPI-plus annual increases in revenue bases that are inherently resilient, are analogous to super-charged inflation-protected bonds.
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That makes them incredibly attractive to institutions, like pension funds, that have liabilities that mature in decades. The assets themselves (as opposed to their market value) are an inherently low-risk asset class with very low volatility. Without any financial engineering, they deliver solid returns, something better than fixed interest securities but something less than equities.
Bartholomeusz is correct to a point: infrastructure assets are reasonably low risk propositions in normal times, and ignoring the absurd prices previously determined by the market in the past five years, they should provide their owners with consistent, albeit unspectacular returns. (Admittedly, whether listed or unlisted, those returns are seriously hampered by excessive management fees, but most fund managers don’t seem to care).
The problem is, these aren’t normal times. An asset like a toll-road should have foreseeable cash flows for years to come. Based on population extrapolations, investors and banks will usually have a reasonable idea of future traffic flows, or in the case of an airport, future passenger flows. However, while financial models can consider externalities, it is nearly impossible to predict the effect of a shock like “peak oil”.
A toll road isn’t suddenly an “inherently low risk” asset when petrol costs $4.00 a litre and people stop driving (in the US, oil imports fell by 22% in April, meaning that high petrol prices were causing people to drive a lot less). While most infrastructure assets don’t face pesky competitors or regulatory issues like operating businesses, in an era of peak oil, they couldn’t accurately be defined as a “low risk” investment.
The situation with the listed infrastructure plays like Transurban, Macquarie Infrastructure Group and Babcock and Brown Power is even more diabolical. The listed vehicles have all been duly deserted by investors courtesy of their debt funded, opaque structures which have lured gullible investors with massive, (faux) yields.
In the past few months, those previously accepting investors finally realized that the vehicles are in fact nothing more than elaborate Ponzi scheme of sorts — the only difference between the Babcock/Macquarie satellites and Charles Ponzi is that Ponzi used equity to pay for distributions to existing owners, whereas the infrastructure vehicles use bank debt.
The Macquarie Model thrived in a period of low inflation, low interest rates, abundant oil, reasonably minimal competition for assets and gullible/naïve/foolish governments keen to sell off the silver at any price — with most of those factors dissipating, investors are rightfully running for the hills.