Euromoney, May 2009

If you want a microcosm of the bad habits global capital got into as the credit crunch hit, go to Brisbane. The story of Brisconnections there has everything you need, and its conclusion – unresolved at the time of writing – will have major ramifications for the way infrastructure is funded in Australia and beyond.

BrisConnections was set up by Macquarie Capital Group and the construction firms Thiess and John Holland to design, build, operate and finance a A$4.9 billion airport toll road in Brisbane, under a 45-year concession awarded by the state of Queensland in May 2008. BrisConnections floated two months later at A$1 a share, lost 60% of its value in a day and by November had hit one tenth of an Australian cent, the lowest possible price on the Australian Securities Exchange. The A$1.2 billion float, underwritten by Macquarie and Deutsche, used an instalment model in which investors paid A$1 up front, with two more payments to come in subsequent years, meaning they remain on the hook for two instalments which will each cost 1,000 times more than the trading value of the stock today.

How did it get to this? There are many components to the BrisConnection story and they all speak to the way infrastructure has become commonly funded in western markets.

The wrong assets for listed markets. When infrastructure first started to make its way to stock market investors, it was typically when a government sold an operational power plant or road: a tangible asset, throwing off consistent cash, and something you could go and see if you felt so inclined. BrisConnections was typical of a trend to list projects that were not yet built. “Listed markets are a natural home for assets when they’re more mature and yielding,” says Lachlan Douglas, director of Principle Advisory Services, which structures private market investments for institutional investors. “They don’t tend to go a good job of being a home for assets going through significant transformation, and there’s no greater transformation than when the thing’s being built.”

Worse, retail investors who in Australia had come to see infrastructure as a safe haven failed to note the difference and thought they were buying a cautious yield play. Nor did they ask where dividends could be coming from when there was no asset yet to generate them: the answer was from borrowings. These things get away in the good times but as BrisConnections was launched at a time of quickly changing attitudes to debt, institutional investors (including Macquarie itself) quickly jumped ship, triggering the share price falls and putting most of the stock into retail hands.

Financial engineering. The source of the dividend was only one example of common financial engineering structures that have since backfired. The most obvious was the instalment method.

People buying into the float knew clearly that there would be three separate payments of A$1 each, a year apart, and while the method is unusual it is certainly not unheard of. The problem was that some small investors in the secondary market don’t appear to have realised this and inherited huge obligations when they bought in. One investor spent A$600 on the stock at 0.3 cents per share without realising that doing so committed him to A$400,000 of subsequent instalment payments. Others are up for millions. So it was that a housewife called Fang He found herself becoming the biggest individual shareholder in the company by mistake, followed more recently by a 26-year old Melbourne entrepreneur called Nick Bolton, a lank-haired bohemian figure in designer stubble and a beanie. (The sting in the tale was that Bolton used his shares to launch a series of motions to wind up the company in order to get out of paying the later instalments – then at the last moment sold his voting rights to the contracted builder, Leighton, for A$4.5 million and voted all his shares against the very resolutions he had proposed.)

At the time of writing it was still not clear if Macquarie and Deutsche were going to pursue small investors for the later instalments, suffering the crushing PR of putting people out of their homes by doing so, or wear the costs of the shortfall on the two scheduled A$390 million raisings themselves by taking the vehicle private.

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