Last rites for Macquarie model

Last week, quite quietly, Macquarie Infrastructure Group sounded the final death knell for the old model of listed infrastructure funds that Macquarie pioneered.

In a low-key announcement to the Australian Securities Exchange, MIG announced a planned distribution of 10 cents per security for the half-year to June. It went on to say that this would be the last distribution to be paid under the policy of supplementing cash flows with surplus funds to pay distributions and that future distributions were likely to reflect payments more in line with cash flows.

The original Macquarie model for listed infrastructure added asset sales and, more particularly, revaluations and associated refinancings, to boost distributions beyond the cash flows generated by the underlying assets. MIG was one of the earliest, if not the earliest, pioneers of the concept.

The model was an ingenious response to a core problem with financing greenfields infrastructure – the time it takes between investing the capital to fund a toll road and the point at which cash flows build to a level than enables it to generate attractive returns to investors.

By returning capital in the build and ramp-up phases and then refinancing against revaluations – in effect bringing forward future cash flows – the model has enabled listed infrastructure entities to offer solid yields.

In the pre-crisis environment the model worked. Indeed, with debt cheap and plentiful, the funds were able to leverage aggressively and turbo-charge yields. The external management structures provided increased incentives for the managers to pursue debt-funded growth and push the envelope on what was sustainable.

Post-crisis, of course, the model has been discredited by the focus on excessive leverage and falling valuations. Transurban's dramatic shift to a conservative funding structure and distributions tied to cash flows is now the benchmark for the sector.

The unwinding of the model, and the spectacular implosion of BrisConnections on listing, means that it is improbable that the listed structure will be adopted within the foreseeable future for a greenfields toll-way or other infrastructure project. The Transurban version of the model may be sustainable in a listed environment for funds owning relatively mature assets. MIG has a combination of mature and immature investments.

By aligning distributions with cash flows MIG is bowing to the prevailing sentiment, which has trashed its security price. The fund is cashed up, with perhaps $700 million of cash left (before the distribution and after a continuing buy-back program) from asset sales made last year.

At the asset level all its refinancing for this year are covered and it has said that less than 15 per cent of its portfolio debt is due to be refinanced over the next three and a half years.

However, to bring itself in line with the new norm it will need to progressively reduce the substantial leverage and complexity within its structure.

No doubt it will also be considering further asset sales and even privatisation of the fund as options for trying to narrow the gap between its security price and underlying net assets of about $3.30 per security.

The recent $1.64 billion agreed takeover of Macquarie Communications Infrastructure Group by Canada Pension Plan Investment Board has demonstrated that there is still significant interest in infrastructure assets from pension funds at values well above those available in the listed environment.

Macquarie's own unlisted funds portfolio – it switched its emphasis from listed funds to unlisted funds several years ago – has been growing as a result of the world's pension funds for assets that generate CPI-plus growth in cash flows to match their own long-term liabilities.

The planned reduction in distributions – MIG may not move immediately to aligning them with cash flows but could get there progressively – is therefore the first step in what will inevitably be larger structural changes to the fund, and perhaps even its disappearance from the listed scene.