The credit squeeze is felling flagship infrastructure projects. This is increasing the focus on how we define the asset class. Shayla Walmsley reports

A year ago, it looked as though Macquarie was on a direct route to world domination. Last month, the Australian bank that has blazed a trail through global infrastructure was riled. Its chief executive, Allan Moss, responded robustly to claims that high leverage was putting at risk the bank's 30-plus infrastructure funds, with US$202bn (€141bn) under management, and threatening the bank's business model.

He told the Financial Times that the claims had not been made by "serious analysts" or "leading investors". He pointed out that most of the bank's funds were leveraged below a "reasonably conservative" 60%.

If his pique was unambiguous, the substance of his response was trickier to tease out. After all, Moss had left the big questions unanswered - notably, how much debt is too much debt. Are the critics wrong about the funds' average leverage but right to be critical of leverage per se? Or were they wrong and wrong - that is, wrong about the funds' leverage and wrong that leverage was a bad thing?

Karen Smith, a spokeswoman for the bank, declined to offer significant enlightenment. After all, 60% is an average, not a rule. "The debt depends on the asset," she says. "You can't predict the cash flow of an asset, or the pattern of usage. It depends what kind of asset it is."

Other than the infrastructure mantra that infrastructure offers long-term assets providing stable cash flows, Smith only reaffirmed the company's commitment to "an appropriate capital structure".

"The question is what is appropriate leverage," says Standard & Poor's credit analyst Michael Wilkins. "This will depend on the quality of the business, the cash flows generated by the business in terms of visibility and sustainability, and the asset backing."

Refinancing at risk
The mighty appear to be falling mightily and in concert. Just weeks before Moss's feisty defence, Spanish infrastructure group, Ferrovial, announced that its plans to refinance £8.5bn (€12bn) of debt associated with BAA, the UK airport operator, were in jeopardy. The firm said a UK regulatory review had "negatively affected the timing and practicability" of a refinancing plan that was well advanced, with a defined loan structure already in place.

The review, inter alia, had demanded caps on charges levied by the operator on airlines for using its UK airports, and would push BAA returns down from 7.75% to 6.2%. It was, said Ferrovial, "a regulatory settlement of unprecedented severity". 
Beyond the press statement, Ferrovial declined to comment on its warning. How uncertain is the plan? And if the refinancing doesn't go ahead, what are its options? Disposals, most likely, with World Duty Free most likely to be first on the block, with minority stakes in subsidiaries

You could argue BAA is a case of bad luck in aggregate - the result of several negative developments happening at the same time (with ill-judged regulatory interference thrown in), rather than a broader, fundamental setback for infrastructure investment.
But it's an indication that all may not be well, even in one of the most highly prized and competitive infrastructure sub-categories. Critics of the Macquarie model claim it can only work with cheap debt and high prices. "I think this is a little simplistic," says Wilkins. "The key is to make sure you are dealing with true infrastructure."

Where's the money?

How strong an indicator of investibility is the ability to refinance? For Macquarie, it's a significant one. For Ferrovial, it's most likely a mere aspiration. Other firms have done pretty well in refinancing terms thanks to close relationships with long-term banking partners. Recently, for instance, Deutsche Real Estate, a subsidiary of real estate firm Summit Germany, refinanced its core portfolio, increasing its debt from €184m to €231.5m thanks to a seven-year loan underwritten entirely by ABN Amro.

A spokesman for the firm pointed out that "banks wouldn't refinance if they weren't sure" but still described the deal as "amazing", given the current credit climate.
For Wilkins, refinancing shouldn't necessarily be taken as a vote of confidence in the asset class. The problem has been the "acquisition hybrid" combining project finance structuring techniques with leveraged finance facilities lent to "true" infrastructure but to service stations. "As a result, increased debt multiples are often coming at the expense of necessary risk mitigants," he said in a recent report. S&P claims $34bn of infrastructure loans could be paralysed.

Debt is more expensive, but it isn't unavailable. Investcorp in October put UK motorway service station group Welcome Break on the block with a £500m price tag. The move came 10 months after the private equity firm struck a transferable £300m recapitalisation deal. Macquarie acquired the firm's chief competitor in the UK market, Moto, last year.

The irony is that Wilkins' sharpest criticism is reserved for assets such as motorway services firm Autobahn Tank & Rast, recently 50% acquired by Deutsche Bank subsidiary RREEF for €1.3bn. Despite being in a category that would not previously have been acknowledged as infrastructure, then private equity owner Terra Firma was able to refinance its debt with €1.2bn seven-year senior loan.

"True" infrastructure assets, as defined by Wilkins, provide an essential public service under regulatory protection or governmental oversight. They're also in a strong competitive position, including quasi-monopolies, with high barriers to entry.

Yet, even in "true" infrastructure, deals are likely to suffer. Wilkins cites the £2.8bn acquisition of Associated British Ports by a consortium that included OMERS' Borealis and the Government of Singapore Investment Corporation (GIC), which he claims is unlikely to mitigate market risks posed by environmental and regulatory hurdles limiting future expansion.

So is this the beginning of the end of the beginning for infrastructure as a mainstream asset class, about to collapse under the weight on debt? Unlikely. Macquarie in September acknowledged that the global repricing of credit was slowing the pace of acquisition, and forcing potentially acquisitive investors to drop out of competitive bids. Not that you'd notice - and in any case the bank was clearly attempting to reassure the market after its shares lost 10% because of concerns over that  leveraged model.

"My view remains that appropriately leveraged and structured shouldn't be a concern," says Wilkins. "Only those which are pseudo-infrastructure which have been highly leveraged and poorly structured may unravel."