Thoughts and Opinions On Today's Important Issues

Friday, April 17, 2009

P3 Investing: Before And After

Do you remember some of the news stories encouraging people to invest in Infrastructure Funds? Small investors were being dazzled by the kinds of returns that these Funds are going to generate for them. They were supposedly a safer alternative than investing in stock market mutual funds as an example.

How many sophisticated investors like pension funds or Sovereign Funds for instance poured money either directly into Infrastructure or indirectly into these Funds managed by top people. They too were going to get big returns over time that would match their requirements. They were being encouraged, actually required in some cases, to lock in their money for long periods of time.

Here is a story that you will not believe out of Australia where a lot of these P3 deals started. I trust that the Michigan Legislators will ask MDOT about these type of transactions in a lot more detail, especially because MDOT has been talking to Australians about P3s.

I would suggest that the Canadian and Ontario governments do so as well but there hardly seems to be a point in doing so. For whatever reason, they seem ready to throw billions of dollars worth of projects at these P3 firms so that they can generate huge profits at taxpayer expense. Perhaps if someone would actually show my BLOG to some of our Canadian politicians, someone might actually wake up and stop this madness.

  • BrisConnections shares expected to soar

    May 20, 2008

    ANY motorists who will drive along Brisbane's new airport link should grab some BrisConnections shares.

    At least that way they will be gaining on the swings what they lose on the lack of roundabouts and traffic lights.

    One of the major selling points for the $1.2 billion BrisConnections float will be a stellar internal rate of return of around 17 per cent.

    That compares with a more traditional IRR in recent years of around 12 per cent.

    When you add on a 14 per cent yield for the first year, followed by an 8 per cent guaranteed yield for six years as the second and third instalment payments are made, it could make paying the tolls for 45 years easier to swallow.

    It is also the reason why Leighton subsidiaries John Holland and Theiss plan to park themselves on the share register on the same terms as other shareholders.

    And why a list of around 17 institutions, including consortium member Macquarie Capital, are already in the queue to pick up shares in the offer, which is due to list late this year.

    The public offer to be revealed in the next couple of weeks is also underwritten by Macquarie Capital, Credit Suisse, Deutsche and JP Morgan.

    The reason behind such a strong yield and rate of return is simply that the twin 6km road tunnels to the airport are guaranteed to grab a large slice of Brisbane traffic.

    Quite simply, the link will be one of those irresistible and difficult to avoid pieces of infrastructure that link various parts of Brisbane together.

    Which means traffic projections that will support the $4.8 billion project, with a total two-way toll on current dollars of $7.50.

    That provides a highly predictable and CPI-adjusted revenue stream on which the project hangs.

    It is also enough to keep the debt providers happy at current market yields - which are substantially higher than when previous Australian PPPs were written."

And then only 6 months later, watch this report or read the transcript below. It is an incredible story! Almost unbelievable.

The shares dropped to the point that they were almost valueless. More than that, because of how the deal was structured, those who bought in as speculators may also meet financial ruin even though they bought shares which crashed to 1/10th of a penny.

There is now a lawsuit going on in Australia to windup Brisconnections. That is a bizarre story as well since

  • "the company's biggest shareholder is a 26-year-old owner of an IT company operating from a block of flats in St Kilda.

    Nicholas Bolton of Australian Style Investments bought 47,643,166 BrisConnections unit trusts for about $47,600...

    [Name of newspaper] has concerns that Bolton may not be able to pay the $95,286,332 he will owe the toll-road company for his shares:"


  • Many Brisconnections shareholders facing financial ruin

    Broadcast: 20/11/2008

    Reporter: Thea Dikeos

    Many small time investors in the recently floated company Brisconnections could face financial ruin after discovering the shares they purchased are to be paid for over three instalments. Many investors bought into the company when the share price plummeted from $3 to just a mere tenth of a cent believing they were snapping up a bargain. Now, investors face bills running into millions of dollars when the next dollar per share payment is due in April, a liability they claim was never spelled out to them.

    KERRY O'BRIEN, PRESENTER: The biggest single success story of modern banking in Australia, Macquarie Investment Bank, has saw its share value tumble many times more than the market in recent months, and has copped a profit mauling as well. But there's one bizarre story emerging about a company set up by Macquarie called Brisconnections, in which many small time investors who thought, later on, that they were snapping up a bargain re now facing the prospect of particularly excruciating pain in the hip pocket.

    Brisconnections was floated in July after winning a $3.5 billion contract to build a toll road in Brisbane, a deal brokered by Macquarie Bank. Shares were issued at $3 each, to be paid in three instalments of $1. But when the share price of Brisconnections plummeted to just a mere one tenth of a cent, bargain hunters moved in. Now, they face bills running into millions of dollars when the next dollar per share payment falls due in April, with another to follow in 2010. Thea Dikeos reports.

    THEA DIKEOS, REPORTER: Ramesh Velougondaiah may not look like a big time stock market player, but this IT consultant from Toongabbie in Sydney's west owes a staggering $5,640,000 for his shareholding in a company called Brisconnections.

    RAMESH VELOUGONDAIAH, BRISCONNECTIONS SHAREHOLDER: Definitely, I don't have $5 million, even if I sell myself, you know, or my rest of life, I think I don't make $5 million.

    THEA DIKEOS: He's not alone. Brisconnections was floated in July after winning a $3.5 billion contract to construct a toll road from Brisbane to the airport. But the international credit crisis drove the share price down to a minuscule tenth of a cent attracting many small time investors who thought they were snapping up a bargain.

    Gerhard Limnios bought two million shares for his 82-year-old mother.

    GERHARD LIMNIOS, BRISCONNECTIONS SHAREHOLDER: There's no way that mum could afford, you know, paying $2 million. She's living, you know, with is, and she's on a pension.

    THEA DIKEOS: What these investors say they didn't know when they purchased the shares was that they owed the company more money. Shareholder activist Stephen Mayne owns 500 Brisconnections shares.

    STEPHEN MAYNE, SHAREHOLDER ACTIVIST: A lot of people have bought the shares for one cent or 0.1 of a cent not realising that next May, they have to pay another dollar a share and then 12 months after that, they've got to pay another dollar. So, a lot of people weren't properly informed about the legal obligations that came with buying these one cent shares, and now - never before in Australian corporate history have we seen a situation like this, where small mum and dad shareholders are going to be sued for potentially hundreds of millions of dollars.

    RAMESH VELOUGONDAIAH: I was really shocked. I didn't expect it to pay another $2, and I thought it's like a normal share and when I'm buying in CommSec, there is no information that I need to pay another $2.

    THEA DIKEOS: Did you do enough research, do you think, into the stock?

    RAMESH VELOUGONDAIAH: Not really, actually, for this particular share, I didn't do a lot of research, as I'm busy with other kind of the family commitments.

    THEA DIKEOS: Ramesh Velougondaiah bought over five million shares for approximately $5,000, using the online trading facility CommSec. He contacted Brisconnections and said he wouldn't be able to pay the first instalment of over $5 million in April and asked about his options.

    RAMESH VELOUGONDAIAH: They said that they are going to send the debt collectors to collect this money if I don't pay after the April.

    THEA DIKEOS: Gerhard Limnios purchased the $2 million shares on behalf of his mother on the ANZ E-trade site, and he only found out about the further $2 instalments when the 7.30 Report contacted him.

    GERHARD LIMNIOS: We have never actually seen the prospectus. When you go and you purchase, you know, the shares online, there's no warning message that you're buying a commitment with those shares.

    THEA DIKEOS: The company insists it did enough to warn investors of the liability.

    TREVOR ROWE, CHAIRMAN, BRISCONNECTIONS ('Inside Business', 15 November): We write to them and we send 'em a kit which has not only information on the project, and a project that we think is a very sound project, it's moving ahead effectively - so it has that detail and it also reminds them in bold letters there is this outstanding commitment that they have. Now, now: it's on the website, it was in the PDS. What more can one do?

    STUART WILSON, AUST. SHAREHOLDERS ASSOCIATION: It's something that I've not seen in my time on the share market, where you have a company that is floated, has an amount owing to it from the investors, and proceeds to tank to - into oblivion, leaving shareholders a.) with no value, and b.) with an obligation for another $2 per share.

    THEA DIKEOS: The deal was put together by Macquarie Bank, which earned over $100 million in fees and commissions.

    STEPHEN MAYNE: They just simply got this one wrong. They offered too much to take on this infrastructure project. They did one of their cute structures, with the, you know, three instalment payments, and they loaded the thing up with too much debt and now it's completely blown up in their face.

    TREVOR ROWE: I have a view that in the longer term this is an extremely valuable investment. This is a crucial piece of infrastructure connecting Brisbane's CBD with the airport.

    THEA DIKEOS: Macquarie Bank recently sold its shares in Brisconnections, but its not the end of the matter. If these small investors are unable to pay up, it will be Macquarie and Deutsche Bank who'll have to come up with the money.

    STEPHEN MAYNE: I think they'll be the ones who end up stepping up and paying, but if it becomes a really big public fiasco and scandal, well then maybe the pressure will be on the Queensland Government to step in and take back an infrastructure project which a lot of people thought probably should have been a Government project in the first place.

    THEA DIKEOS: The chief executive of the Australian Shareholders Association supports the idea of the Queensland Government stepping in and letting the small but heavily endowed investors get out.

    STUART WILSON: There's no market for these people to get out of this obligation. There's no one buying it, so effectively they are stuck and that's certainly no fault of their own.
    THEA DIKEOS: But Macquarie Group's chief executive Nicholas Moore has ruled out seeking any assistance from the Queensland Government.

    NICHOLAS MOORE, CHIEF EXECUTIVE, MACQUARIE GROUP: The Government has negotiated a concession deed with the company. The Government's position is absolutely clear on that. This is the responsibility of the company, its advisors, its underwriters and its funders to make sure that this project gets delivered as specified to the Government.

    TREVOR ROWE: If they don't pay in April, we have an obligation under the underwriting agreement that we need to pursue the collection of any outstanding instalments. But we get the money anyway, 'cos it's underwritten by Deutsche Bank and Macquarie Bank.

    Gerhard Limnios hopes to sell before the deadline, but says he might consider paying someone to take the shares off his hands.

    GERHARD LIMNIOS: Just before drowning, then you would say yes. You have no other choice; but other than that, probably not.

    THEA DIKEOS: Ramesh Velougondaiah is banking on being able to sell his shares by early next year to avoid his $5 million bill. But that is by no means a done deal.

    What happens if you get to March and it hasn't sold?

    RAMESH VELOUGONDAIAH: Oh, that's really worrying me - worries me.

    KERRY O'BRIEN: A market dynamic you'd never want to experience. Thea Dikeos with that report.