Aus & NZ: Transurban chief says bargain buy infra will not return

17 October 2018 - 12:00 am UTC

Transurban chief executive Scott Charlton has said that the high prices recently paid for infrastructure assets have not indicated the kind of over leveraging which occurred before the financial crisis.

Transurban is famed for building its business partially on savvy purchases of distressed toll roads that were often built based on overoptimistic traffic forecasts and financed with a lot of debt. He has previously said a quarter of the group’s assets have been acquired from receiver sales at less than half what they cost to build.
But he told the Citi Annual Australian and New Zealand Investment Conference in Sydney on Wednesday (17 October) that although we’re now at the “top of the market”, he was not seeing those opportunities again.
“One thing that has been pretty consistent is that debt has remained pretty disciplined,” he said. “So what we haven’t seen, and what blew up infrastructure [projects], is over leveraging, accretive swaps, and CPI bonds and all this stuff that put huge financial leverage on these parties.”
The high prices now consist of more equity, with many superannuation and pension funds still under allocated to the sector, he said.
He cited two recent bids where debt packages were similar.
One was the I-66 P3 road in Virginia, which was a rare bid that Transurban lost in November 2016. He said that was due to a big price difference of about USD 1bn between Transurban’s consortium and one led by Cintra. 
“Even though there was a massive difference in price, the debt package [of the two final bid groups] was pretty much the same on I-66,” he said.
The story was the same on Sydney’s AUD 16.8bn (USD 12bn) WestConnex project – which Transurban’s Sydney Transport Partners consortium paid AUD 9.3bn for a 51% share in September.
Numerous sources have told Inframation Transurban was the one this time that paid well above its IFM led opponent to the tune of more than AUD 2bn.
“When we did WestConnex, the state was saying we want investment grade credit ratings, so everyone did basically the same sort of debt package,” Charlton said.
The opportunity for “leverage” now is not so much financial as “operational”, he added.
“We do see a lot of assets around the place that could be run much better that are in the hands of different parties and their area of expertise is not operations it is more passive. So you can get more leverage out of that – being an owner operator.”
Australia and US remain focus
Australia’s high population growth rate and the United States’ need to upgrade infrastructure mean these countries will likely stay important markets for Transurban.
He said there is now some “blow back” from the public over the amount of disruptive construction occurring in Sydney and Melbourne and some trepidation from politicians as a result, but he said the country’s population growth projections mean more roads will be needed at some point.
“NSW and Victoria in real terms are doing the most infrastructure that has been done for quite some time, if not ever. That does lead to construction fatigue and some blow back until they are delivered.
“[But] Australia is still one of the most active markets and you look at our pipeline still that’s just being delivered in NSW and Victoria. He said “hopefully something gets started in Queensland” but that may be “optimistic” given the political opposition to privatisation.
“We are going through a difficult time with politicians and licence to operate with the public and we have to make sure we are transparent,” he added. “But I am optimistic about infrastructure because there is just the weight of the population demographics in the cities means we have to do something.”
Like Australia, in the US the states are the main owners of infrastructure. Trump’s USD 1trn infrastructure plan has not seen any action yet, but at some point the states there will need to replace infrastructure, he said.
“We have been talking about this for 30 years now. There is a lot of hype around Trump, but at some point there is going to have to be private sector involvement to procure the funds available to build that infrastructure.”

Read more