Thursday, 31 October 2013

Airport disaster averted

The Hobart Airport consortium (TGC) has survived another year, avoiding looming disaster by injecting more equity and offloading a sizable chunk of debt. The recently released 2012/13 financial statements have revealed how consortium members, including RBF with a 49.9% interest had to find another $121 million to refinance and reduce debt. Finance costs and management fees have strangled the consortium since inception. Dividends have been conspicuously absent in the past three years and capital expenditure dependent on more borrowings.

Just a quick recap.

RBF’s 50.1% partner is the Macquarie Bank run Global Infrastructure Fund III (GIF III) The whole show is run by Macquarie.

Five years ago consortium members put in $200 million cash and organised borrowings of $209 million, $174 million of which was drawn at that stage, to assist with the purchase of Hobart International Airport Pty Limited (HIAPL) from the government owned Tasports for $352 million. After a further payment of $10.3 million in fees to investment bankers for arranging the deal and $4.2 million for borrowing costs, the balance was used for working capital. Interest on most of the borrowings ($172 million) was fixed at around 9% via an interest swap agreement taken out for a 15 year period. Since then interest rates have fallen. Hence considerably more interest has been paid than had TGC elected to stick with a floating rate.

Fixing interest rates for 15 years is unusual. For the consortium to fix rates at 9% suggested expected returns were in excess of 9%. Else why borrow? Why not divert other funds that were earning less?

When a borrower fixes a rate for 15 years there's always a party on the other side of the deal that fixes earnings for 15 years.

Imagine locking in a 9% return for 15 years with a super fund underwritten by a AA+ government.

Why would a super fund with government support agree to guarantee a third party a 9% return for 15 years when returns to its own members were less? The logic is not immediately apparent.

In November 2012 TGC renegotiated borrowings which by that stage were fully drawn, a total of $209 million, and also opted to exit the interest swap agreement. Because interest rates had fallen to around 4% the cost to exit the agreement with 10 years to run was a whopping $74 million.

The total cost to quit existing commitments was therefore $283 million.

A fresh banking syndicate agreed to a new facility of $175 million of which $158 million was drawn. Borrowing costs were $6 million.

To cover the cash shortfall TGC shareholders put in an extra $121 million, a figure roughly the same as the accounting losses since inception of $122 million.

Turnover $160 million for five and a half years. Losses $122 million. That’s it in a nutshell.

The cash inflows and outflows for 2012/13 are summarised in the following table. The consortium doesn’t produce consolidated financials but an abridged cash flow statement for the group tells the story. It’s basically a cash business so the cash flow statement is also a pretty good proxy for a P&L (with depreciation missing).


Airport turnover has grown steadily each year but the operating cash profit before tax and interest (EBITDA) has been pretty static at $21 million over the past three years. In the past year employee numbers rose from 28 to 32 and employee expenses increased by a third from $2.8 million to $3.7 million. The EBIDTA was needed to pay for capex and investment fees (mainly interest and management fees of $2.3 million to Macquarie). However TGC was left with a cash deficit of $6 million before the capital reconstruction.

When the costs of interest rate protection via the swap agreement are considered, the effective interest rate paid on the old borrowings, specifically the fixed amount of $172 million was approximately 17.5% pa. Effectively credit card interest on $172 million for five years.

By way of explanation an interest swap agreement is a separate to a loan agreement.

The loan agreement will provide for interest payments based on floating rates.

The swap agreement is an agreement for the lender to pay interest at the fixed rate while simultaneously receiving interest at the floating rate. The net amount is income if floating rates exceed fixed rates but an additional expense if fixed rates exceed floating rates. The latter is what occurred with TGC.

The fees paid by TGC to investment bankers have been:

·       fees associated with the purchase of the airport of $10 million

·       initial borrowing costs of $4 million

·       costs to renegotiate the borrowing facility of $6 million

·       additional interest costs via the swap agreement  of about $26 million

·       cost to exit the interest rate swap agreement of $74 million.

A sub-total of $120 million.

Yet the total operating cash over the same period has only been $105 million.

For the financiers to clean out every $ of operating cash, and more, leaving nothing to pay interest costs at floating rates and capex is a stupendous achievement.

To continue with the list of outlays over the past five and a half years:

·       amounts to investment bankers (from above) of $120 million

·       capex of $43 million

·       interest at floating rates of about $53 million

·       dividend in 2010 of $1.5 million

A grand total of about $220 million.

The cash shortfall was therefore $115 million as operating cash was only $105 million.

That’s why shareholders had to put in another $121 million.

Extra cash was also needed as the banking syndicate required TGC to maintain a bank account with at least enough to pay the next six month’s interest. At 30th June the debt service reserve account had a balance of $6.5 million. A possible indicator of the bankers’ level of nervousness perhaps?

The Abbott government is likely to reward the errant behaviour and subsidise some of the losses, in other words to indirectly reimburse the consortium for some of the extravagant fees paid, with a $38 million grant spun as funding for the airport upgrade. Consortium members funded the investment banking extravagance but not extra capex? Leaving taxpayers to pick up the tab? They put in $121 million, why not another $38 million?

The consortium is now where it was five and a half years ago with similar debt, fortunately however facing lower interest rates.

It is likely shareholders will get a return in the future but maybe not a dividend. More likely a return of some of the extra capital subscribed to keep the ship afloat.

An interesting aside, which may be a portend, was when TGC renegotiated its borrowings the operating company HIAPL became the borrower. Previously it was HIAPL’s parent company Tasmanian Gateway Corporation P/L.

The parent is owned 100% by the holding company, Tasmanian Gateway Holdings Corporation P/L. RBF’s interest in the consortium is via a 49.9% interest in the holding company. Its partner GIF III is a fixed term fund due to be wound up in five year’s time coincidentally when the borrowings are due for review.

If one is to believe RBF’s public pronouncements that the airport is a good long term investment then it may well end up with the other half of the airport when GIF III withdraws but unless RBF grows a bit, 100% of the airport might be an imprudently excessive investment for a small fund.

If RBF ends up with 100% of HIAPL it will have no need for Macquarie as a manager nor the other companies in the consortium which only exist as part of the Macquarie designed paper shuffle.

Taking over HIAPL with whatever level of borrowings is sustainable and optimises returns may be a future option for RBF.

Being the actual operator however is not usually a preferred strategy for a super fund.

Opting to become a minority shareholder in a Macquarie shakedown is not much of a strategy either.

The broader question is not RBF’s involvement in this debacle but the wisdom of the public sector offloading natural monopolies to the private sector. Efficiency gains are not evident with the airport in private hands. All earnings from an essential service have been diverted to financiers and governments are preparing to step in with more handouts.
It’s been shameful public policy.




  1. Shameful is putting it mildly. Tony Abbott disguising corporate welfare to the paupers at Macquarie Bank as 'an upgrade' is just as abhorrent.

  2. Fascinating analysis John. I enjoy these best in the morning but I sometimes wonder if the slightly distant view brought on by the evening doesn't give a simple, honest picture.
    Here we have what should be a public asset. It's used mainly by the public and was undoubtedly originally built on public land at public expense. It's trading in the black to the extent that it makes more than it spends, however the simple reality is that it's being used a means to enrich those who neither sow nor spin.
    Until we get on top of these basic realities, it's going to be one GFC after another.

  3. Two of our former big-shot politicians were to fall love with this sale of the Hobart Airport, even though the Mainland Macquarie Bank Raiders had not put their hands in their pockets for one red cent of that which they now hold the controls thereto.
    At the time this dealing was transacted nobody could believe the stark blatancy of the duplicitous intent that was inherent and known expressly by each of the principles involved in this dealing that really only had this Banking excuse and 2 State government ministers in the name of Paul Lennon and Michael Aird who could carry out this sting.
    Shortly after this rather surprisingly quick sting was completed the CEO of the RBF (the RBF providing the only source of cash in this whole shifty business, was soon to disappear from Tasmania.
    The fees charged for this concocted shakedown by the Mainland Macquarie Raiders were in the region of $60,000,000-00 (plus or minus.)
    If and when this deal is placed under a microscope and intensely examined- then it will become obvious that the only cash that went into this deal was the money paid into the purchase by the RBF, The Gateway Consortium's input was by way of moneys then either guaranteed available to them by the Macquarie banksters, or were to borrow their portion of the purchase price at the same moment as this deal was to be signed..
    The next shonky bit that followed was the awarding of 49.9% of this whole heavily cost inflated shebang, was to see that the The Gateway Consortium had acquired the controlling percentage of 50.1%.
    This entire shakedown was put to both the aforementioned Tasmanian government ministers who only had their eyes on the sale price bikkies, neither cared a damn as to the resultant fiscal fallout that befell the RBF.
    Both of these government ministers still reside in Tasmania, I am continually fascinated that neither co-conspirator has succumbed to any show of their obvious guilt for their part in this ruinous unconscionable rogue conduct, nor has there been an examination conducted to determine how the Mainland Macquarie Bank Raiders could pull such a sting over the State of Tasmania.
    This particular dealing shows the enormously shallow depth of both integrity and the abysmal intellect held by these 2 former hierarchy touts of Tasmania's Lib/Lab coalition government.

    William Boeder.