The latest investor presentation from Macquarie Atlas Roads details in buttock-clenching detail the performance of the M6 Toll, Britain’s only privately financed major toll road, and it is not a pretty sight.
I blogged in April about the state of the M6 Toll’s finances, and if anything, things seem to be getting worse. It’s not so much that the road makes a loss (are you listening, mainstream media? Thought not). It’s the state of its balance sheet. The M6 Toll may soon run out of money to cover its liabilities.
The important figures are the ones on the right. EBITDA – the industry standard of profitability – is now nearly 27 times less than net debt (when net debt includes the nasty amortising swap discussed previously). For a toll road, that is not merely insane: it is psychotic. The banks must be praying to whatever gods they have.
It gets worse. Debt service cover ratio is just 1.13, meaning that there isn’t much cash flow to service debt repayments, which currently are interest only. Below 1, and the road would quickly become insolvent. We can see (as if we couldn’t have guessed) that the road is in ‘lock-up’, i.e. not paying dividends to shareholders, because the DSCR is below the minimum 1.4 required to do so. (Incidentally, Macquarie, who was your financial adviser for the Warnow Tunnel? Because a minimum DSCR of 1.05 is pretty heroic).
And given the traffic trend, things aren’t going to get better. Revenue was up slightly in 2012, but this was probably due to a greater proportion of heavy goods vehicles on the road. Raising tolls is likely to put people off even further.
So, if the road becomes insolvent, what happens next? Well, according to MQA’s own documentation, insolvency constitutes an event of default under the concession agreement, allowing the Secretary of State for Transport to terminate the concession. There are caveats, of course: the government would have to give the banks 28 days’ notice and (as is standard) they could take it over themselves. But why would they? Who’d buy it off them? What could they do with it?
To be honest, as this government doesn’t like nationalising, and the banks would prefer worse terms to writing off their loans, I don’t really see this happening. Much more likely is the scenario I outline below. But it’s intriguing. Some have called for the road to be renationalised, but this would save the government from having to pay Macquarie (or the banks) a penny.