While I’ve been on holiday, that easy target of UK infrastructure easy targets, the M6 Toll of lovable rogues Macquarie, has continued to go down the toilet of structured finance – though not in a way that will bother the Australian investment bank.
I last wrote about the road in June, noting its poor financial performance and suggesting that the concession agreement* could be taken over if it became insolvent (which was looking increasingly likely). As previously noted, the company which built the M6 Toll and now looks after it and collects its toll revenues, is loaded with bank debt which has to be repaid by 2015 unless a new deal is reached. Macquarie’s penchant for jacking up the debt to pay shareholder dividends in the good times has come back to haunt the road.
The latest set of accounts, for the first half of 2013, suggest that that its parent company Macquarie Atlas Roads (a company listed on the stock exchange, but run by Macquarie Group executives) has given up on repairing its finances and expects it to go insolvent – or to be voluntarily put into administration.
Macquarie Atlas Roads (MQA) has de-consolidated the M6 Toll concession agreement. In other words the profits, losses, debtors and creditors of that road’s operator no longer feature in MQA’s accounts. This is because, in MQA’s own words, a chat with the banks who are owed over £1 billion by that operator:
“led to the conclusion that MQA was no longer expected to be exposed to significant variable returns from the asset and should therefore no longer consolidate the M6 Toll group.”
Translation: we no longer expect to own this road company in the not too distant future. Given the M6 Toll’s dire financial position, this doesn’t hint that someone is eager to buy it off MQA, rather that it’s about to call in administrators.
A senior banking source recently pointed out to me the high net debt to EBITDA ratio of the road (see previous post for explanation of this metric). In return for continuing to extend lines of credit to the road beyond 2015, banks would like to see a chunk of that debt paid down. But to reduce the current ratio (nearly 27x EBITDA) to the desired amount (no more than 8x at least) would mean paying down over two-thirds of the debt – over £900 million. There is no business sense for MQA in throwing over £900 million at an asset at once, and where would it get the money from?
For a company as huge as Macquarie which works in a risk-averse sector like infrastructure concessions, “handing back the keys” in industry parlance would be a big black mark on their reputation. In an earlier blogpost, I noted that MQA was in talks to restructure the M6 Toll’s debt wrote that:
“In project finance, restructuring is what you do when you have to admit that your project isn’t going to make quite as much money as you hoped and so you are unable to meet the requirements of the lenders (banks in this case) to the project… This deal will be the infrastructure equivalent of telling Mummy and Daddy you’ve pissed your student loan up the wall and can they bail you out, but with the proviso that Mummy and Daddy gave you permission to do so.”
In that case, insolvency is more like disappearing off to Peru and sending Mummy and Daddy your student ID card, asking if they’d like to take on your degree course and its associated student loan.
MQA can do this because this is a project financing – the debt is secured against the concession agreement and the revenues it was supposed to get from tolls; there is no “recourse” to MQA. This need not be a risky arrangement, in fact it is more often than not safer than lending to a large company. But in the case of this particular road, it’s gone sour.
Meanwhile MQA is laughing all the way to the bank. With the road’s massive £1.2 billion of bank loans and other liabilities off its books, it made an accounting gain of about A$1.8 billion, which turned into an accounting profit of A$1.4 billion (£821 million).
*the contract that gives Midland Expressway Ltd (itself owned by Macquarie Atlas Roads) the right to collect toll revenue from the road, in return for operating and maintaining it