Heard on the street(5)

Infrastructure Investor doesn't like to miss a beat, so if there’s an infrastructure conference to be had, chances are you’ll see one of our reporters there with their ears pricked for new talking points. Here’s what we learned at several gatherings we attended in New York in recent weeks.

1.  “Greenfield” vs. “brownfield” is too simplistic

Heard on the street

The time-tested distinction between greenfield and brownfield infrastructure assets is increasingly being challenged by practitioners as being “too simplistic”. They bemoan the fact that they are often marketed as being high-risk and low-risk, respectively. The truth is you can find greenfield projects that are less risky than brownfields and vice-versa – it all depends on the contractual structure in place for the investment. At the recent Dow Jones Infrastructure Summit, Jordi Graells, the man behind Abertis’ bid for the Pennsylvania Turnpike, turned heads when he told delegates that the so-called brownfield lease on the deal would require his concession company to take on capital expenditures worth $6 billion on a net present value basis. That’s much more money than you see going into many a greenfield. Investors should take note: there is a significant grey area between the two categories – and it matters.

2. Focus on costs, not tolls

The debate over user fees for infrastructure assets managed by private investors will likely never die down. Americans have got used to paying artificially low fares for their toll roads and are naturally resistant to any change to the status quo. But rather than framing the debate in terms of “the government let us do it” thanks to agreed-upon fee escalation schedules, investors should focus on the overall cost of transportation infrastructure in the US. It’s been under-funded for way too long and, whether you look at publicly- or privately-managed assets, costs overall are going to have to increase – period.

3. Stop dangling money in front of politicians

Fund managers must focus more on what they can bring to the table beyond large upfront payments in exchange for governments’ infrastructure assets. Sure, money is important since cash-strapped states and municipalities need it more than ever. But if the deal feels more like a sale than a true long-term partnership, then naturally there will be more opposition to it and the market won’t develop as quickly. Across the industry there is a growing sentiment that the early deals like the Chicago Skyway and the Indiana Toll Road failed to “open the floodgates” to infrastructure deals precisely because they were more the former rather than the latter. At the New York State Infrastructure Summit, Macquarie managing director DJ Gribbin said that a lot of investors were “running around with the Indiana Toll Road burned in their brains”, trying to pitch money instead of benefits. He urged delegates to refocus their pitch on the power of  PPP to deliver projects faster, cheaper and smarter.

4. Using deal proceeds to subsidise municipal budgets is not such a bad thing

One of the favourite conference talking points of recent months is finally being challenged head-on: that taking PPP deal proceeds to subsidise state and local budgets is a terrible use of money and should be avoided at all costs. Sure, in an ideal world, the lease of existing infrastructure assets would result only in a “capital-for-capital” exchange, where governments take the money, pay off debt and reinvest the proceeds to generate ongoing interest that will strengthen their credit ratings, contribute to their rainy day funds and free up revenues for other priorities. But in practice, it’s not such a bad thing to use some of the up-front priorities to subsidise budgets and fund social programmes. It’s what Chicago did with $100 million of the $1.8 billion it gained from the Skyway lease. “Had we not done that, I’m not sure the deal would have passed,” Dana Levenson, head of North American infrastructure banking at RBS and at the time of the deal chief financial officer for Chicago, told delegates at the New York State Infrastructure Summit.

5. No more “window-dressing”

“You know that parking business you said had ‘very stable, infrastructure-like cashflows’ that is now going bankrupt? Well, we’re not going to fall for that again,” is a message one is likely to hear more and more from lenders’ credit officers up and down the country. At the Dow Jones gathering, bankers from Société Générale, HSBC, RBC and Barclays called this “window-dressing” and said they want to see more core infrastructure assets rather than commercial enterprises dressed-up as infrastructure. “The whole reason for dressing up businesses as infrastructure was to get tighter lending terms than would otherwise be available,” Barclays’ Trace McCreary told delegates. That gig is now firmly up. If it’s not core infrastructure, it’s not going to get credit spreads appropriate for core infrastructure assets.

6. Bridge-to-bonds? It’s possible

Loan financing is hard to come by, but if this year’s early rebound in the corporate bond market is any indication, there is still investor appetite for bonds. Which is why more banks may want to consider giving infrastructure investors a “bridge-to-bonds”: an arrangement in which they under-write debt with the intention of going to the bond market shortly thereafter to unload some of their commitments. The key consideration is confidence in the bond market, so deal makers need to tread carefully. And yes: the banks likely won’t sign up for this type of arrangements unless they get the take-out on the deal, i.e. they get to float the bonds and pocket the lion’s share of the fees.

7. Is it infrastructure? Focus on the cashflows, not the asset type

When people think of infrastructure, they usually imagine ports, roads or bridges. But plenty of other assets can qualify as infrastructure; it just depends on their cashflow characteristics. Just ask Michael Rolland, the head of Borealis Infrastructure, the direct infrastructure investment arm of the Ontario Municipal Employees Retirement System. At the Dow Jones event, he discussed Borealis’ bidding for the Teranet Income Fund. Teranet provides exclusive access to the Ontario Electronic Land Registration System, which enables customers to conduct electronic registrations as well as title and writ searches relating to property. Rolland said its monopolistic status, high barriers to entry and essential service provision made its stable cash flows as attractive an infrastructure asset as any traditional asset like a road or bridge – if not more so.

8. Quality matters just as much as quantity in enabling legislation

27 US states have now passed general legislation to promote infrastructure. But there is a sea of difference between a weak bill that just enables a few limited pilot projects, and a robust piece of legislation like Virginia’s 1995 Public-Private Transportation Act. That act has spurred a flurry of innovative, unsolicited proposals for public infrastructure projects like the Virginia Hot Lanes project and, more recently, the CenterPoint bid to operate the Port of Virginia. So investors should not just keep a tally of which states are moving in the right direction but also measure the how big their steps are.

9. Embrace the unions

Unions have typically been seen as enemies of PPPs and an unnecessary cost item in any infrastructure asset model. However, like it or not, most infrastructure assets involve unionised labour and the question of how to bring unions on board with PPPs must be answered if the US market is to truly take off. That message is spreading across the industry now, and a possible solution being discussed frequently is the idea of getting unions to participate in projects as investors: have them invest their own money in greenfield projects using preferred equity or other instruments that allow them to generate current yields on investments that may not see cashflows for five years but generate jobs today.

10. Expect deal sizes under $1.5 billion, but don’t think that’s the limit

Dealmakers expect deal sizes to stay small in the near term due to the continuing scarcity of debt, but there is some wiggle room in how small – or how large – they expect deal caps to be. There is a consensus that big deals can still get done – if funds put more on the table than just money for cash-strapped governments. Throw in a credible commitment to improving asset performance, and you can break past $1.5 billion.