Tuesday, 8 March 2016

Basslink under water?

Who exactly is Basslink Pty Ltd (BPL)? Given there’s a distinct possibility that its undersea cable problems will take a lot longer and be more costly to fix, is BPL in a position to weather the storm?

BPL owns and operates the Bass Strait interconnector. It is the main player in the Basslink group which in turn is owned by a Singapore listed infrastructure business.

The Basslink group doesn’t make any money.

In the latest year 2015 for which full audited figures are available, it lost $22 million after losing $25 million in the previous year. Interest payments on borrowings, are the major cause of the losses.  Without the monthly facility fee from Hydro, its only source of income, it’s likely to soon need funds from somewhere else to service borrowings and fix the cable fault.

BPL was set up by UK company National Grid. It reportedly cost $875 million to build the interconnector which starting operating in 2006.

In 2007 when BPL was sold by National Grid to the Singapore based CitySpring Infrastructure Trust, the Basslink business had a value of $1,175 million. Since then CitySpring has morphed into the Keppel Infrastructure Trust  which is listed on the Singapore Stock Exchange, two thirds owned by the public and one third by Temasek Holdings, the $350 billion sovereign wealth fund of the Singapore government.

Keppel owns or part owns a number of infrastructure businesses. All apart from Basslink are in Singapore and include gas production and retail, gas fired power generation and desalination.

There are about twenty companies in the Keppel stable including ten in the Basslink group.

 Investment bankers’ fingerprints are evident with the predictable assortment of operating companies, holding companies and limited liability partnerships.

BPL’s ultimate holding company surprisingly is domiciled in the Cayman Islands. There are reasons for such complicated structures apart from generating fees for investment bankers. One is to minimise tax and another is to frustrate claims and limit liability. BPL and Hydro already have had one protracted commercial disagreement which resulted in a $6 million win to Hydro. Another is likely given the current problems.

Keppel’s purchase of BPL was financed by bank borrowings and intra group loans.

In 2014, intra group loans were written back by $140 million as uncollectable because falls in future expected revenue from the interconnector had reduced the value of the Basslink investment.

The latest events mean the value of the Basslink investment will be adjusted downwards once again. Its value at this stage is unlikely to exceed bank borrowings implying all equity contributed via intra group loans has been wiped out. In short the Basslink group is likely to be currently underwater. Liabilities exceed assets and there’s no money coming in the door.

That doesn’t mean the overall Keppel group is insolvent. Not by any means.

Its latest gearing, in other words net borrowings as a percentage of total assets is only 34%. This figure was calculated before any adjustments caused by the cable outage, and has probably deteriorated since. Keppel has just changed its financial year to end on the 31st December (it was previously 31st March) so we might see full audited accounts plus an annual report in a few weeks time, by the end of March 2016 hopefully which may show the effects of Basslink’s problems?

To what extent will Keppel come to the rescue of the Basslink subsidiaries if the going gets really tough is the crucial question?

There may come a point if repairs are too costly and all the additional outlays don’t add much value to an asset that has just suffered a large drop in value, when commercial prudence might suggest abandoning ship.

Keppel in its latest annual report indicated Basslink borrowings are secured by the interconnector asset itself. The impression was given that other infrastructure assets in the wider Keppel group are not exposed to Basslink’s borrowings. Hence it may be an option for Keppel to walk away from Basslink’s problems. Just call in the undertakers and walk away.

Certainly the corporate structure is in place to quarantine Basslink from the rest of the Keppel group should the need arise.

Premier Hodgman in his interview with Mercury state political editor Matt Smith published here  certainly gave the impression that he is prepared for the unexpected.

To date all we’ve heard is a few media releases from BPL nothing at all from Keppel, the listed entity. The Keppel unit price has dropped about 10% since the outage, which has wiped about $200 million off its market value.  

If the worst case scenario eventuated, Hydro would find itself in an even worse position than existed at the time Basslink started in 2006, after which the breaking of the drought together with net imports of electricity from the mainland for four years gradually restored dam levels.

Hydro might free itself of the monthly Basslink facility fee, roughly $70 million in total every year, but it would be stuck with a separate liability resulting from its decision to insure against interest rate fluctuations that form part of the facility fee until 2031. The latest assessment of the amount needed to opt out of this additional agreement was $342 million. It’s an inescapable liability no matter what may happen to Basslink.

Hydro has also paid a deposit of $50 million to BPL intended to offset against facility fees in the last three years of the Basslink supply agreement from 2028 onwards.

BPL is holding all the cards, that’s for sure.

The additional costs of gas and diesel generation are far in excess of any savings from temporary cessation of the facility fee, hence it is clearly in Hydro’s best short term interests if the fault can be fixed, even if no compensation is forthcoming from BPL.

However that may not coincide with BPL interests should the fault be serious and costly, which with every passing day, is looking increasingly likely.

(Published in The Mercury 8th March 2016)


  1. Make an essential service single point sensitive and place it beyond the control of the population by privatising it - is that the model? Add to that the failure to negotiate a contract in which failures were somehow compensated and we have the perfect model for creating crises culminating in an economic mess. Brilliant!

  2. John, thanks for this detail, but can you please explain to us dummies how the $342 million liability comes about from an insurance policy against interest rates, if the underlying agreement goes tits up because of a failed cable?


    Simon Warriner

    1. Simon, I described it as an insurance policy against changing interest rates, but that was as a way to help people understand.

      Strictly speaking it’s a swap agreement.

      Assume an agreement either a loan agreement or, in this case a facility use agreement with an inbuilt interest rate component.

      Further assume the interest rate is a variable rate.

      If the borrower (or fee payer) is concerned about rising interest rates then he can enter into a swap agreement with a third party to pay an agreed fixed rate to the third party in exchange for the third party agreeing to pay the borrower the variable rate.

      That way the borrower receives a net amount should interest rates rise, and have to pay a net amount to the third party should interest rates fall.

      The borrower has hedged interest rates via an interest rate swap agreement. I described it as an insurance policy.

      In the case of HT it entered into a facility fee swap agreement with Macquarie Bank in respect of the Basslink facility fee. Interest rates have crashed since the agreement was taken out and it still has another 15 years to go.

      The present value of the estimated swap payments over the next 15 years was $342 million at 30th June 2015.

      In other words should HT wish to buy its way out of the swap agreement it would have to pay $342 million to Macquarie Bank.

      The swap agreement is a separate agreement to the loan/facility fee agreement. Should the latter go in the way you describe, it would still be payable.

  3. John, thanks for the explanation.

    I am still a little confused. HT has fixed its facility fee costs by entering into the swap agreement with McQ. If the cable fails surely there is no facility fee, seeing as no facility is being provided. In the case of there being no fee, there would be no interest rate risk and McQ would be getting their $342 million for nothing.

    So in other words, HT has insured/covered itself against rising interest rates, but not against a failing cable or the possibility of the swap agreement remaining active if the facility fee the swap protects ceases to be required because of cable failure.

    I am no genius when it comes to contractual matters but that risk seems to me to be at the more elementary end of the complexity range and certainly well within the pay grade of the geniuses paid to run an organisation like HT.

    Right now what I am hearing is that if the cable has failed and is just a hard to get at length of scrap metal HT still owes McQ Bank $342 Million.

    I have seen some pretty sharp deals done over the years, but that one by McQ seems to take the cake.

    I guess one should ask what the cost to HT would have been to date if the interest rate swap agreement had not been purchased/negotiated.



  4. Simon, we can’t be certain without seeing the contract.

    But if we were talking about a conventional interest swap agreement re a loan say on a commercial property, and the property burnt down, the interest swap guy would still want his money for the remainder of the term, as would the bank for the outstanding mortgage.

    The property owner would rely on insurance proceeds.

    I did hear that HT has no insurance that would cover loss of profits etc from Basslink breakdown.

    It presumably will have to try to sue Basslink?

    It really depends on what the fee swap agreement say.

    The swap agreement is currently costing almost $40 m pa. To date I reckon it has cost HT at least $200 m.