Costs had more than doubled
against forecasts, profits were few and far between and shareholders were
frustrated. For more than 15 years, the project had been a write-off." The above statement could easily be a description of the
Eurotunnel train link beneath the English Channel, the largest privately
financed infrastructure project in history. But it actually comes from a 1987
study, Suez: Du Canal à la Finance
1858–1987, written by French economist Hubert
Bonin. The treatise examines the history of the Suez Canal, which was built with
private capital in the 19th century.
Ferdinand de Lesseps, the canal’s developer, was never able to
deliver the returns he promised to investors. He tried again with the Panama
Canal, but a French court found him guilty of mismanagement before the canal was
completed. Only the elderly de Lesseps’ death saved him from jail. It ultimately
took Teddy Roosevelt, using U.S. government money, to finish it. Despite these alarming precedents, private investment in
infrastructure projects is again in fashion. However, strategies have changed.
Developers and fund managers now tout infrastructure finance as a sure-fire,
high-return bet, mainly because they are not backing new projects (with their
substantial construction risks). Instead, they are investing in existing assets
that have a history of producing stable cash flows. Some of these are being sold
by one private-sector owner to another. Others are public-sector facilities,
such as toll roads, that are being privatized. The buyers typically use the cash
flow from these assets to support leveraged recapitalizations, often recouping
part of their initial equity investment by extracting a large dividend payment
in the process. Australian bank Macquarie and Spanish contractor Cintra bought
the Chicago Skyway toll road from the city of Chicago for $1.8 billion in 2004,
with $1.2 billion of debt and $600 million of equity. Within eight months, they
had completed a leveraged recapitalization and extracted $350 million of their
original equity stake as a dividend. In another transaction, Macquarie financed
a $1.8 billion upgrade of the M6 toll road in the UK in 2001. This past
September, it refinanced the project and reaped a $700 million gain. The
Macquarie-Cintra team is pursuing a similar strategy with the $3.8 billion
Indiana Toll Road (ITR), which it acquired from the state of Indiana last
summer. Macquarie has been the most active investor in infrastructure
finance since the 1990s. In recent years, however, AIG, Credit Suisse/GE,
Goldman Sachs, JPMorgan and Morgan Stanley have jumped in. Unfortunately, as
competition for assets grows, the days of easy refinancing gains are coming to
an end.
Investor enthusiasm is beginning to make the sector a victim of
its own success. Growth in the number of bids for assets is forcing prices up.
Investors have to look more closely at whether the cash flow from the underlying
asset can support the debt.
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