End of an era

THIS SUMMER COULD mark the end of an era at Macquarie. In August, shareholders of Macquarie Infrastructure Group (MIG), one of the firm’s oldest listed infrastructure investment funds, will receive their final distributions paid under an arrangement that has become outdated.

The Sydney Stock Exchange-listed firm recently advised shareholders that the 10 cent per share distribution they will receive in August “will be the last distribution to be paid according to the policy whereby operating cash flow was supplemented by surplus funds to pay distributions”. Future dividends will avoid supplementary funds and will be “likely to reflect payments more in line with cashflow”, MIG said.

These ‘surplus funds’ have included proceeds from asset revaluations and debt refinancings. This allowed the fund to pay out more cash to shareholders than its business was actually generating.
The strategy worked well when debt was cheap and asset values rose. MIG bought assets and was then able to revalue and refinance them, which helped it pay out a steady stream of semi-annual payments to shareholders for 12 consecutive years. It also helped fuel growth in its stock price: MIG’s shares more than doubled between 2000 and 2007.

But then the credit markets collapsed. As asset values started to fall and cheap debt ceased to be available, investors decried the practice as “manufacturing” distributions and “financial engineering”. Shares of listed infrastructure firms in Australia sold off precipitously, losing more than half their value between the end of 2007 and March 2009, according to data from Bloomberg. In other words, market sentiment had turned against enhanced distributions.

Evidence of this came last year, when a Macquarie-underwritten initial public offering of BrisConnections imploded on debut. BrisConnections had won a 45-year concession to develop a toll road in Brisbane, Australia. Construction of the road was expected to last four years but the firm promised holders of its partially paid units (shares which require future capital installments) it would pay out distributions in the meantime  – enhanced, in part, with debt. The stock sold off 60 percent on the day of its initial public offering and plummeted to $A.001 per share shortly thereafter.

MIG, whose portfolio of toll roads includes interests in many flagship assets such as the Indiana Toll Road and the Chicago Skyway, has fared better. Its shares have fallen only about 67 percent since its March 2007 peak of A$3.94, closing on A$1.30 per share as of press time.

However, A$1.30 per share is still two dollars below MIG’s net asset value of A$3.30, as of February. To close that gap, the firm has commenced an on-market share buyback, and is selling assets to pay down debt.

In so doing, it has reverted to another practice that investors have grown weary of: MIG’s most recent asset sale, the disposal of a 50 percent interest in the Westlink M7 in Sydney, was made to the Western Sydney Roads Group – an entity that is partly owned by MIG.