Straight razor shave for BrisConnections

Like fallen toll road operators before it, BrisConnections used wildly unrealistic assumptions to attract investors. Now those equity holders face the prospect of a capital reconstruction leaving them shaved clean.

For the second time in its relatively brief but colourful history it would appear BrisConnections is going to have to do a capital reconstruction, with the likelihood that this time there will be a total wipe-out for equity holders.

After trading in the toll road operator’s securities was suspended on Monday, the group said that an analysis of traffic levels after the introduction of tolls on the link from central Brisbane to its airport earlier this year had indicated that its enterprise value might less than its outstanding $3 billion or so of debt.

Given that traffic volumes on the toll road have been less than half those forecast, that’s not surprising and follows similar tales of equity holder destruction within other toll roads launched in the balmy pre-financial crisis environment of cheap credit and unbridled optimism.

BrisConnections was an early victim of the sea-change in attitude towards listed infrastructure once the crisis developed, well before the Airport Link was actually built.

The fact that it used a three-tranche instalment structure and only the first of three $1 per security payments had been made when the crisis, and BrisConnections’ own first crisis, developed ensured it got off to a terrible start.

Security holders, many of them "mums and dads" who bought up the initial instalment receipts at fractions of cent each, were caught with residual $2 per security liabilities and the prospect of throwing a lot of good after small amounts of bad.

Throw in the intervention of opportunistic entrepreneur Nicholas Bolton and the situation was very messy, with desperate investors assigning their securities to fictitious people to avoid the liability and Bolton transferring his to a family friend (clearly a very good one) with no assets.

In the end the underwriters, Macquarie and Deutsche, mainly Macquarie, let them off the hook and provided the bulk of the $390 million owed through the second instalment, with Macquarie effectively undertaking a debt-for-equity swap because it had extended BrisConnections a $322 million bridging loan. Macquarie still holds about 46 per cent of BrisConnections and Deutsche about 33 per cent.

That was, in effect, BrisConnections first capital reconstruction.

The BrisConnections story isn’t a new one. There has been a long list of a toll road operators that have either fallen into administration or have had to be reconstructed, including the
other Brisbane entity, River City Motorway, which operates the Clem Jones tunnel.

The story is very consistent. In every instance the operator badly over-estimated traffic volumes and therefore its cash flows.

The key problem with those toll roads that have experienced difficulty is that to win the concessions during that pre-crisis period they essentially had to use overly-optimistic – wildly unrealistic – assumptions about traffic to generate the financial outcomes that would enable them to out-bid the competition and attract investors.

They also required lots of leverage to boost the forecast returns and were left stranded when Transurban’s then chief executive, Chris Lynch, re-wrote the norms for listed infrastructure to produce a far more conservative template.

The pioneers of toll roads, notably Transurban and its CityLink complex of toll roads weren’t as aggressive as their successors when it came to their assumptions about traffic because at that point toll roads and, indeed, listed infrastructure generally, was still something of a novelty. Their economics have proven more robust.

It hasn’t helped those later projects, of course, that the post-crisis period for the economy has been one that has been quite subdued.

In BrisConnections, the equity holders will take another haircut – they may end up being shaved clean – and the lenders may also have to contribute but the toll road has been built and does carry some traffic.

It will, one assumes be recapitalised at a more sensible level. Airport Link, like the Clem Jones tunnel, is strategic and important pieces of infrastructure.

Toll roads, or at least a particular generation of them, are like hotels and casinos – it is the second or even third owner that ends up making money from them, not the builders.

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