MIG prepares for flightRecent BartholomeuszMacquarie Group’s...

MIG prepares for flight
Recent Bartholomeusz

Macquarie Group’s listed satellite funds are separately working their way, slowly but methodically, towards independence – Macquarie Infrastructure Group being the latest to acknowledge it is exploring ways to restructure and cut its ties.

Earlier in the year MIG laid the groundwork for a re-working of the Macquarie model of leveraged listed infrastructure by announcing that it would in future make distributions in line with cash flows, where in the past it had borrowed against revaluations to supplement distributions. It subsequently devalued its toll-road portfolio – the largest listed infrastructure portfolio in the world – by $2 billion.

The two announcements cleared the decks for a more fundamental restructuring of the group and a re-evaluation of its relationship with its external manager, Macquarie.

MIG’s chief executive, John Hughes, ran through the options MIG has been considering in his presentation to analysts today.

The status quo has been ruled out because it doesn’t have the potential to restore value to the group’s securities’ price in the medium term. Asset sales in the current environment were unlikely to achieve value-generating outcomes and therefore would probably be value-dilutive for security holders. With asset-level debt being non-recourse to MIG, there was no need for an equity raising, which would be dilutive – and in any case the economics of replacing debt with equity would not be economically rational today.

Having ruled out the more conventional options, MIG was left with a more creative and complex possibility – splitting its international portfolio of interests in 10 toll roads into two discrete entities through an in specie distribution to security holders.

MIG says that the assets would probably be segregated on the basis of their risk/return profile. While it didn’t elaborate, the MIG portfolio is a collection of quite mature toll roads and some quite immature ones. The maturity, or otherwise, of a toll road generally equates to the level of operational risk.

That would be a rational way of differentiating the two portfolios and exposing them to different sets of investors with different appetites for risk and return.

Another would be to carve up the portfolio on the basis of the asset-level leverage.

While MIG says a split would address the leverage in assets and the potential drag this has had on the valuation of better-performing assets, it is unclear how leverage could be reduced unless new equity was introduced at the asset level.

It is also conceivable that the portfolio could be sliced up along geographic lines in order to appeal to domestic investors – MIG has interests in North America, Australia and Europe – although there was nothing in the presentation to suggest that was a likely option.

In fact, when MIG refers to segregation of the assets according to their risk/return profiles, it is probably talking about a combination of all of the above, but most particularly distinguishing between those assets that are carrying high leverage and those than aren't, with a secondary screen that relates to their maturity and performance and therefore their capacity to sustain leverage.

The reference to the drag that leverage is having on the valuation of the better assets in the portfolio appears to be a somewhat broader and more market-related view – there is little doubt that the market tends to aggregate the leverage at the asset level and ignore the fact that the debt is non-recourse to MIG and the lenders against each asset have no claim on the rest of the portfolio. Making that clearer by separating the better and less leveraged assets from the rest might lead to a reappraisal of their value. With MIG valuing its assets at $2.54 per security and the market at about $1.40, there is potentially a couple of billion dollars of value affected by the market's treatment.

Whether or not there is a split in the portfolio, the issue of Macquarie’s management contract will be under review – the externally-managed model for listed funds has been discredited by the crisis and has been, or is being, unwound across the market.

MIG’s sibling, Macquarie Airports, announced late last month that it planned to internalise its management by paying Macquarie $345 million in scrip to relinquish its position.

While that has ignited fierce protests from smaller security holders, who don’t see the fairness in paying Macquarie to exit when there is no obligation in the management agreement to do so, it has generally been favourably received by the market. Without Macquarie’s active co-operation internalisation could trigger pre-emptive rights at the asset level and probably debt covenants.

MIG has diplomatically deferred any discussion of the management rights, and any consideration for them, by referring the issue to a committee of independent directors and their advisers, presumably waiting to see how significant the backlash against MAp’s proposal might be.

With Macquarie Group already pursuing a new strategy and a different model – with the acquisition of a big US funds manager overnight, an infrastructure investment joint venture in China and a widespread beefing up and globalisation of its operating businesses – MIG and MAp represent legacy issues to be tidied up and left behind as Macquarie moves forward.

There are still some major issues to be resolved and, no doubt, controversies to rage before Macquarie can put the listed satellite element of its historic strategies behind it. The funds are, however, moving inexorably towards that outcome.