Most infrastructure debt in Australia takes the form of bank loans, the issue of bonds or private placements with institutional investors and fund managers. The stapled security offerings of listed infrastructure groups are treated as equity for these purposes although a significant component of the subscription price is structured or distributed as a loan to another entity within the group. Many listed and unlisted PPP projects raise debt by issuing bonds. The capital structure of the Southern Cross Station project in Melbourne employed three tranches of bonds:
● US dollar denominated 11.5 year fixed-rate bonds (A$126 million)
● Australian dollar denominated 12 year floating-rate bonds (A$200 million)
● US dollar denominated 30 year indexed bonds (A$135 million).
The composite bond method of financing PPPs is widely used in Britain and Canada and is based on project finance principles and high leverage. An advantage of this financing method is the opportunity to structure financial risk management into the tenor, currency and pricing of the bond issue. Standard & Poor's survey of unlisted European PPP projects in the period 2004-06 suggests initial debt capitalization averages 76-82% increasing to 85% at the first refinancing (National Audit Office 2005; Standard & Poor's 2004, 2005).
Table 3 CAPITALISATION OF THE IPO PPP MODEL
| AUD millions | RiverCity Motorway Brisbane | BrisConnections Airport Link Brisbane | Eastlink Melbourne | |
| IPO Equity Raising | 724 | 1,226 | 1,120 | |
| Bank debt | 1,434 | 3,055 | 2,088 | |
| Dividend Reinvesment Plan | 150 | 361 | 297 | |
| Deferred Equity | 155 | 200 | 290 | |
| State Contribution | 377 | 47 |
| |
| Total | 2,840 | 4,889 | 3,795 | |
| Construction Cost | 2,003 | 3,400 | 2,502 | |
| Debt: Equity Ratio | a | 51% | 62% | 55% |
SOURCE Prospectus 2004, 2006, 2008.
NOTES
a Market capitalisation at date of listing on the ASX. Debt %
The pricing of debt is largely determined by credit ratings for the larger Australian projects and by credit evaluation for privately sourced senior, junior and mezzanine finance. Present tight liquidity in capital markets, higher spreads and tighter credit standards suggest that sponsors of new PPPs will need to adjust overt leverage levels more in line with the average debt levels of the market as a whole. In March 2008, average debt capitalisation of the ASX All Industrials stood at 64.3%. Such a figure is non-weighted and fails to take into account the important relationship between stable, indexed revenue and debt servicing capability that are a feature of mature infrastructure investments. These properties suggest that infrastructure has the capacity to support debt levels over and above ASX sector averages and the appropriate level of leverage is best determined on a case by case basis.6 Non-listed investments are generally more highly leveraged than either listed infrastructure or ASX market averages.
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6 Infrastructure assets possess many of the characteristics of listed property. Research conducted in recent years found that the return of listed property trusts and infrastructure assets disclose a statistically significant correlation and both asset classes show a strong negative correlation with direct property. In a test of leading economic indicators, both asset groups showed a strong negative correlation to short and medium-term interest rates and some similarities in the way that returns were negatively correlated with those of fund managers with a lead time of less than 6 months. Neither listed property nor infrastructure shares a correlation with short-term movements in Australian and US GDP, short, medium and long-term bond rates, the labour participation rate or inflation (Regan 2004).