Australian investment bank Macquarie – which prides itself on savvy investment strategies – looks to have landed itself in a right financial and legal mess in the form of toll road operator BrisConnections.
Macquarie on Monday took legal action in an effort to protect itself from having to cover millions of dollars worth of payments owed for shares in the A4.8bn ($3.27bn) toll road project. The Australian group became a key party in the venture along with Leighton Holdings, with a long-term agreement that they expected would bring hefty profits. But they are now looking at the possible collapse of the massive project.
Not only are banks which had committed to lend around A$3bn to BrisConnections looking distinctly reluctant now. But Macquarie – together with Deutsche Bank – had jointly underwritten a A$390m call due April 29 as an instalment on shares, a call that shareholders are now indicating they will almost certainly fight. What’s more, Macquarie has just piled more than A$320m into bridging loan finance for the troubled company – and another A$390m instalment is due early in 2010.
As Reuters reports on Monday:
BrisConnections,a company set up to build an airport link road in the Australian city of Brisbane, listed last July as a partially-paid stock. Investors paid A$1 initially with an additional A$2 owed in instalments in April and January 2010. Since then, the stock has crashed to A$0.001, battered along with other infrastructure stocks as investors bailed out of any business dependent on debt.
With the stock trading so cheaply, retail investors picked up the shares, attracted by the dividend yield, but that too has dwindled to 0.05 cents per partly-paid share for the first half of the 2008/09 financial year.
A majority of BrisConnections shares are now held by individual investors, many of whom were not aware when they bought in that they would eventually have to stump up an additional A$2 a share on their holdings and are now looking for a way out.
Macquarie and Deutsche Bank have underwritten the instalment payments and would have to make up any shortfall in the payments due in April and next January.
For Macquarie, the situation is beyond disturbing. As BusinessSpectator’s Robert Gottliebsen notes on Monday, it has “a lot at stake”. It had already loaned A$231m in bridging finance and was required to inject another A$92m today (Monday), taking its total bridging loan exposure to A$323m: Macquarie, along with Deutsche, is ultimately responsible for the calls. But once those calls are paid to the banking consortium they must start providing loans first to enable repayment of most of the Macquarie bridging finance, plus the A$200 million Leighton have advanced and then fund the rest of the project. If the project fell over, the money from both Macquarie and Leighton would be lost.
How could Macquarie have ended up in such a complex and messy deal? Actually the debacle goes back to July last year, after BrisConnections recorded what the FT described as a “catastrophic” stock market debut. It listed at $1 a share, underwritten mostly by Deutsche Bank and Macquarie, and now trades at less than one cent. Now, as the group teeters with the prospect of finance drying up, Macquarie along with everyone else involved is frantically trying to save the situation.
In a statement on its website, Macquarie said Monday it has bought more than 31.4m shares in BrisConnections – giving it an 8.06 per cent stake – and taken steps to initiate legal proceedings in the Supreme Court of Queensland to “ensure the relevant parties fulfil their contractual obligations”, in other words, pay up on the instalment call.
Macquarie said it had paid a further principal amount of A$92.5m to BrisConnections under a bridge facility.
Worryingly for the bank known as the “millionaires’ factory”, securities in BrisConnections were trading below one cent on Monday afternoon in Australia, as analysts warned of an investor exodus from infrastructure stocks and other businesses dependent on debt.
As Gottliebsen notes, there is $2 uncalled capital on BrisConnections stock and $1 per share of that is due on April 29. If all shareholders paid, the call would raise A$390m and, based on the value of the project, it’s almost certain, he says, that the $390m would be “immediately lost”.
Nick Bolton, a Melbourne-based IT entrepreneur and a key BrisConnections shareholder with about 13 per cent, is seeking permission for a shareholders meeting to wind up the company so that there would be no need to pay the call. If he succeeds, there is a good chance that the Brisbane city-airport project would fail, notes Gottliebsen.
Further complicating the matter, BrisConnections has retaliated by taking Bolton’s company, Australian Lifestyle Investments, to court seeking to wind the fund up because it cannot pay what it owes. The case is going on in the Supreme Court in Melbourne.
Should the courts allow a meeting to wind up BrisConnections, Macquarie needs to gain sufficient shareholder support to make sure BrisConnections is not wound up. Legal action in the Queensland courts to hold the bankers and others together is absolutely vital. And if the courts allow a wind-up resolution to be put to shareholders, Macquarie (now it has bought shares) has to be allowed to vote. And assuming Macquarie can vote, it may need more shares to ensure there is no wind up, explains Gottliebsen:
Over the weekend Macquarie will have come to the same conclusion as I did, that unless someone moved quickly, the whole BrisConnections project was in danger of falling over… my suggestion was that the Queensland government should intervene (BrisConnections on a knife edge, March 30). But Macquarie has not waited for that – there is too much at stake.
BrisConnections has said even if the company were wound up, unitholders would still need to pay outstanding instalment. It also cast doubt that the company’s assets could be sold.
Related links:
Macquarie sues rebels over toll road – FT
Macquarie to take legal action on toll road project – Reuters
Macquarie begins legal action against BrisConnections – BusinessSpectator
Macquarie makes its move – BusinessSpectator
BrisConnections on a knife-edge – Robert Gottliebsen, Business Spectator
BrisConnections falls 60% on debut - FT