States and cities hoping to fill in budget gaps with cash-outs of future toll-road revenues and the like by handing revenue-generating assets over to private operators for up-front money may be sobered up by a report out yesterday from Australia-based Macquarie Infrastructure Group.
Macquarie, along with Spain-based Cintra, is/was the biggest player in the U.S. market, with its deals for the Chicago Skyway and Indiana tollroads in 2005 and 2006 respectively.
Macquarie IG reported that the value of its asset portolio, largely made up of roads around the world, has plummeted more than 20 percent since June. Macquarie didn’t break out the lower road valuations by nation, only, rather unhelpfully, by hemisphere (it’s the northern one that’s the problem).
But Macquarie did cite “changes to asset discount rates reflecting the current market environment, lower forecast traffic volumes …, higher assumed financing costs …, and the impact of macroeconomic factors such as long-term inflationary expectations.”
Macquarie’s fingering of the culprits here points up how intricately it and its financiers had cobbled together its deals based on a series of important, and possibly fragile, assumptions.
One: that “discount rates” — i.e., roughly the profit demanded from investors to hold such assets — would remain low, reflecting low risk. The lower the discount rate, the higher the asset value, and the more money upfront for states and cities. Two: that financing costs would remain low, due to this perceived low risk, keeping profits high for the private asset owners and operators. And, three: that traffic would increase at a steady rate indefinitely, also increasing the value of the asset today.
Because Macquarie’s concession terms are so long — 99 years on the Skyway – a small mistake in any one of these assumptions, compounded over the projected decades, can add up to a lot.
It’s impossible, from the outside, to know how “robust” Macquarie’s and its bankers’ assumptions on these existing deals were.
But beyond these particular deals, Macquarie’s comments about discount rates and financing costs point up a reality for today’s would-be state and municipal road-sellers. Even in a credit-bubble environment, such deals carried higher financing costs than do municipal deals, due both to municipalities’ tax-exempt status and to the greater credit quality of many of the biggest municipalities. The private operators’ job is to make up for higher, taxable financing costs with operating efficiencies.
Today, due to the appparent poor track record of investment banks’ and project owners’ financial and traffic assumptions on the few deals done in the U.S., as well as the general allergy to risk in the market, such deals, if they could get done, would demand even higher interest rates. While traditional muni bond interest rates are stressed out, too, it’s conceivable that the jittery market would consider traditional muni deals to be even more superior to deals without a guarantee from a government entity than they would have thought a few years ago.
The higher interest rate demanded by the private market on a toll-road cash-out relative to a similar municipal-bond securitisation of future revenues, the harder the private operator of the asset must work to wring out public-sector inefficiencies in operating the actual asset.
This reality, of course, gives the public sector less room for error in identifying such inefficiences and monitoring the private-sector “partner’s” operating performance.