| S&P set to downgrade infrastructure debt as sector heats up |
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| 10/12/2006 | |
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Pension funds take heed: if you have exposure to infrastructure, prepare for credit downgrades. First in line may be airport operator BAA. It was acquired earlier this year for $30.2 billion by Airport Development and Investment, a consortium of bidders led by Spain's Grupo Ferrovial, representing a 16x debt-to-EBITDA multiple, which some rating analysts find expensive compared to historical norms. A downgrade below BBB- or to speculative-grade status may come in Q2 2007 should BAA fail to refinance its debt, says Michael Wilkins, a credit analyst at Standard & Poor's. The rating agency has BAA on negative credit watch. A call to BAA's press office was not returned. Other infrastructure assets have also been bought at frothy multiples in the last six months, warns Wilkins, who is worried about the recent rise in credit risk in the sector. His findings come at a time when a number of institutional investors like Dutch pension giant ABP, with more than €200 billion in assets, are taking increasingly bigger stakes in infrastructure companies like UK-based Thames Water in the form of non-listed equity, even if in percentage terms their entry into the sector still remains relatively small. S&P also has Thames Water, which it rates BBB+, on negative credit watch. Thames was bought in October by Macquarie Bank for $14.9 billion, a 25% premium to the Regulated Asset Base (RAB). Five years ago water companies traded at a discount to RAB, says Wilkins. The debt financing has been arranged through Barclays Capital, Dresdner Kleinwort, HSBC and the Royal Bank of Canada. The investors are made up largely of pension funds and institutional investors in Europe, Canada and Australia. Net profit drops Meanwhile, the performance of some infrastructure funds like the Macquarie Infrastructure Group, an affiliate of Macquarie Bank, has dipped. The group (which is separate from the Thames Water asset) invests in toll roads. It announced on August 24 reduced net profit of $348 million for the fiscal year ending in June, citing adverse "macroeconomic impacts during 2006," according to a Macquarie report. And the $3 billion Goldman Sachs infrastructure fund has struggled to acquire assets, with associated British Ports remaining its only significant win in Europe, according to S&P. These difficulties demonstrate that the infrastructure template might be put under pressure should interest rates start to rise, says Wilkins. "Highly leveraged deals might become less attractive to investors as the lending climate changes and liquidity dries up." An official at Macquarie, however, points out that its Infrastructure Group is only one of many listed funds. "The weighted average of 24 of our infrastructure funds has returned 17% per annum in the last twelve years," she says. Yet it is difficult to ignore that aggressive financing has increased debt-to-EBITDA multiples. Recent deals have ranged from 12 to 30x, compared to a historical range of 8 to11x. "It is hard to understand how that could be," says Wilkins. "These acquisitions are two to three times more leveraged than in the LBO market where debt-to-EBITDA multiples are 7x." Typically, once an acquisition is made, the debt makes its way onto the balance sheet of the target company. As a result, S&P has seen a deterioration of infrastructure balance sheets. Even as some infrastructure assets remain unrated, M&A activity in the sector is heating up. So far in 2006, infrastructure has seen more than $145 billion in M&A activity, representing a 180% increase since 2000. The United Kingdom, Italy and Spain have seen the most significant investments since 2003. V.B |
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