Commentary1:17 PM, 15 Jun 2009 Stephen BartholomeuszAsciano's...

Commentary

1:17 PM, 15 Jun 2009 Stephen Bartholomeusz
Asciano's protracted process

TOP News
Asciano to raise $2 billion in capital to reduce debt


"Mark Rowsthorn and the Asciano board have been criticised for the leisurely pace of their very protracted "monetisation" process. As it has transpired, their decision to hasten slowly has produced what appears to be the best possible outcome for Asciano stakeholders in the circumstances.

Three months ago, when the board finally decided it had to get serious about assets sales and/or capital raisings to address the $2.8 billion re-financing challenge that will confront the group next May, the option of a general equity raising wasn’t on the table.

With the price of Asciano’s stapled securities languishing around 50 cents and a market capitalisation of less than $400 million it simply wasn’t possible to raise sufficient equity to deal with the threat of the debt. That forced the group to look at asset sales, the introduction of a strategic cornerstone investor and/or combinations of those options, with or without an equity raising as well.

Circumstances have changed dramatically over the past three months. The rebound in equity markets has been remarkable. In that period more than $40 billion of equity has been raised and the value of Asciano securities has soared to more than $1.80. What wasn’t practicable in March had suddenly become a very viable option.

In fact, it had become the preferred option once it became clear that Asciano could arrange the underwriting, through UBS and RBS, for a $2 billion equity issue.

A sale of one of Asciano’s unique portfolio of infrastructure assets – its port, intermodal and coal businesses – would not only see it selling irreplaceable assets under duress but would also cost it very high quality earnings before interest, tax, depreciation and amortisation (EBITDA) and therefore, while Asciano would be able to pay down debt, it would have still been challenged to meet its borrowing covenants.

There were a host of possible alternatives to the solution put forward by both strategic and financial players. While equity markets have re-opened, credit markets remain difficult, however, which made it tough for private equity players or other strategic investors to fund deals that would reflect the value of Asciano’s assets in a more normal environment.

The group’s position was analogous to Rio Tinto’s, after its debt-funded Alcan purchase. The problem was a financial one and therefore the best solution was also a financial one – one that maintained security-holders’ exposure to an improvement in financial and economic conditions, rather than a strategic response that reduced that exposure at the worst possible moment.

The quality of the group’s portfolio was underscored by the update and forecasts issued with the announcement of the equity raising. While not immune to the slowdown in the economy, Asciano still expects to post a 3 per cent increase in EBITDA this financial year and another 3 to 7 per cent in 2009-10. These are very defensive and resilient assets.

The equity raising, while not quite sufficient to fully cover the $2.8 billion of debt maturing next year – although there is some potential for security-holders to subscribe beyond their entitlements and Rowsthorn is reserving the option of taking a $151 million placement to maintain his 10.92 per cent stake – will slash borrowings from about $5 billion to about $3 billion. At that level net debt would be a more manageable 4.1 times EBITDA.

Asciano has effectively been saved, not only by the resurgence in markets and the underlying quality of its assets, but because the refinancing risk wasn’t immediate.

The spin-off of Asciano from Toll Holdings in mid-2007 may have left the group over-leveraged, but its brief history at least meant that the structure of its borrowings gave it some breathing space as long its operations generated sufficient cash flow to avoid covenant breaches.

While the noose was tightening as the borrowings rose on the back of heavy capital expenditures, Asciano avoided falling into the sweaty hands of its bankers and therefore was able to determine its own fate."

Augers well for coy's. future IMO.

GL all,
beast