Monday, July 7, 2008

A correction on Sydney Airport

My post on Sydney Airport missed an important part of the capital structure.

Sydney Airport debt structure includes 1.45 billion in redeemable preference shares stapled to the ordinary shares (held by Macquarie Airports) and hence which are justifiably considered equity. Funnily I knew this from past looking at the accounts and had forgotten it. This is also very typical of Macquarie structures so I should not have missed it.

The coupon on those RPS is 13.5%. The negative cash flow of the airport is roughly the coupon on those debts. Indeed if you don’t include the coupon on the RPS as an interest cost then Sydney Airport was slightly cash flow positive including capex during 2007. That was also true in 2005 when the Airport did minimal capex.

If we were to restructure the RPS as equity (which is fair enough as it is subordinated and stapled to the equity) then Sydney Airport is solvent with flat traffic volumes for a few years. However to be worth anything to MAP holders it remains true that revenue has to go up and hence traffic volume has to rise for Sydney Airport to pay the coupon on the subordinated debt – let alone anything on the equity. It remains true that Macquarie has figured rising traffic volume over the long term into its thinking and it remains true that the oil price is causing them issues.

Sydney Airport will still be insolvent with a large fall traffic volumes but a few years of flat to slightly declining volumes is probably supportable provided that there are no short term maturities and the coupons on the subordinated debt get halted. (The listed entity - Macquarie Airports - would still get smashed under these circumstances - but the bond insurers would be OK.)

It also remains true that the debt of Sydney Airport has gone up more or less every year since the Macquarie takeover - and the distributions have been funded by debt.

That can't continue with (a) bad credit markets or (b) falling or even stable traffic.


Simon said...
This comment has been removed by a blog administrator.
John Hempton said...

I do not know how to delete this comment. But a follow up - it was only the CEO of Bristol airport...


Chyin said...

Hi John,

Thanks for your insightful analysis on Macquarie Airport.

I am constantly amazed at Macquarie success and resilience despite its significant focus on transport infrastructure where patronage assumptions, as you’ve clearly demonstrated, can cause material swing in long term cash flow and valuation. (as well as payment of distribution from borrowed cash, but that's for another post.) Contrasting this with Babcock & Brown, which have had a greater emphasis in the regulated and power infrastructure (arguably safer bets?), yet the stock price has been punished (& in value territory?). Is it a matter of size and perceived quality or am I missing some fundamental point about the business model difference? I am interested in hearing your view.

Many thanks,

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