Monday, April 06, 2009

"Privately funded toll roads have overestimated traffic, leaving companies in financial tatters."

Toll road a dead end for investors


Adele Ferguson
The Australian
Copyright 2009

IF Winston Churchill was alive today he might well have applied one of his most famous quotes to the fiasco going on at BrisConnections: "It's a riddle, wrapped in a mystery, inside an enigma: but perhaps there is a key."

In BrisConnections' case, the key might well be its solvency. In a directions hearing in the Supreme Court in Melbourne last week, there were allegations that the company might well be insolvent.

If this is the case, the Corporations Act will be thrown at the directors. For starters they will be in breach of their fiduciary duties for continuing to trade while insolvent, and their statements over the past few weeks regarding how to vote at the extraordinary general meeting would be fair game for any number of class actions.

On a lesser scale, if financial conditions have deteriorated since they last reported in February, they will be in breach of the ASX listing rules, specifically those relating to continuous disclosure.

Given BrisConnections chairman Trevor Rowe also sits on the board of the ASX, it would put him in an even more tenuous position than he already is. He is also on the board of QIC, which took up a stack of shares in BrisConnections as part of the float.

To this end, BrisConnections has agreed to send a detailed report to unitholders, setting out its financial position, including the contents of a report to directors by accounting firm Deloitte.

These reports will be crawled over by all and sundry to work out the real value of the company.

But it would be even more illuminating to independently test the traffic forecasts against the forecasts used in BrisConnections earnings model.

Or better still, get access to the forecasts that were used in the models of the two unsuccessful bidders for the project.

Talk around the traps is that the No.2 and 3 bidders, the Northern Motorway consortium and the NorthConnect Motorway consortium led by Baulderstone Hornibrook, produced traffic forecast figures that were significantly lower than those served up by the winning BrisConnections consortium, which included Macquarie Capital Group and Leighton subsidiaries John Holland and Thiess.

BrisConnections has an earnings model based on future traffic projections. Unfortunately for it, many of the privately funded toll roads have overestimated traffic, leaving companies in financial tatters.

Some of the less successful public-private partnerships over the past few years include RiverCity Motorways, which is building Brisbane's North-South bypass tunnel and is trading at an 85 per cent discount to its $1 issue price.

Others include Lane Cove Tunnel tollway, which missed traffic forecasts and forced its backers to write off the value of the asset in their books. Sydney's Cross City Tunnel was another disaster and ConnectEast Group, the owner of Melbourne's EastLink toll road, has failed to meet traffic forecasts and recently went to investors to raise money to help cover its debts.

But none has caused as much of a fracas as BrisConnections. It was a white elephant from the get-go. Established to build and operate a 6.7km toll road between inner Brisbane and the airport, it raised $1.2 billion by offering units priced at $1 upfront, with two further instalments of $1 each payable over the next 18 months. Within months, the first instalment tanked to 0.001c a share.

The question now being asked is, if the next instalment goes ahead on April 29 and, like the last one, falls to 0.001c a share, will shareholders have to wait another nine months for the third instalment to be paid before an efficient market is restored?

The problem is this: the lowest a stock can trade on the ASX is 0.001c a share. In the case of BrisConnections, its 0.001c share price is not what the market thinks it is worth. Having a 0.001c floor artificially inflates the share price. If shareholders were allowed to sell out for less, they would. There is little doubt this stock would be trading in negative territory.

This then raises the question as to whether BrisConnections is trading in an efficient and informed market. And why did the board, headed by Rowe, allow trading to continue when institutions were dumping the stock at an artificially inflated price, which was then picked up by retail investors, many of whom did not know they had to pay another two instalments?

Either the board or the ASX should have thought about placing this stock in a trading halt.

Questions also need to be raised about why stocks aren't allowed to trade in negative territory, particularly those with instalments looming. The situation now makes a mockery of the role of the ASX in creating an efficient market. The situation wasn't helped when the board decided to cut the dividend and postpone its payment. It's fine for them to postpone the dividend until after the second instalment, but to cut the dividend to 0.005c was a shock to investors who had invested for the dividends in this company.

The board left them with a loss of 99.99 per cent of their investment, no dividends to speak of, and a bill of $2 a share looming.

As one shareholder said: "For BrisConnections to take investors' first dollar, renege on their dividend promises, and expect investors to stump up the next instalment is a sad indictment of the BrisConnections' board's grip on reality. The prospectus, and their presentation, stated that all funding is locked in, the construction contract is locked in ... how can conditions deteriorate, when you do not even trade?"

Interestingly, their accounts reveal BrisConnections had to take a hit of more than $300million from an interest rate hedging on the debt.

If the project falls over, then the banks have another $300 million-plus at risk.

There is a huge amount at stake for all concerned.

Retail shareholders have already lost a fortune, and if they are forced to pay up the next instalment, many will face financial ruin.

The main building contractor, Leighton Holdings has already written down a third of its investment to $130 million and, if the $4.8 billion project collapses, it will blow a big hole in its forward workload.

The Queensland Government has already contributed land and cash worth $1.5 billion to the project and is under pressure to buy the equity, which will blow a big hole in its budget.

There are clearly two camps at war: the financiers and the sponsors. In the first camp are the lending banks, led by ANZ and Deutsche. As an infrastructure expert said: "If they could cancel the project now they get out of jail." What that means is they could write off the money given to the project so far, which is a few hundred million dollars, buy debt and equity and limit the loss. "However, if the project goes ahead, they will have $4.8 billion invested in a project worth probably half that," he said.

In the second camp are Macquarie, the builders and the Queensland Government, who want the project built. As far as they are concerned, once the project is built, the financing can go bad and shareholders and the banks can fix the problem.

It explains why it is in the interests of Deutsche Bank for Nick Bolton to be successful and the project to fall over. Bolton, with almost 20 per cent of the stock, has called for the company to be wound up on April 14. He is being portrayed in the media as a maverick shareholder. Cynics believe Bolton is being supported by the financier faction, but there is no evidence of this and Bolton has denied the allegation in the press.

Macquarie is stuck between a rock and a hard place. It loses money under every scenario.

But the least worst is to keep the project alive long enough for the instalments to get paid, to pay back their equity bridge facility. Put simply, if the instalments get paid, retail investors and Deutsche reduce the size of Macquarie's loss.

It is an almighty mess and it doesn't help the cause of Australian infrastructure, market integrity or the role of boards as representatives of all shareholder interests. Rowe has put himself and his reputation in the firing line. The outcome will become clearer after the extraordinary general meeting.

© 2009 The Australian:

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