Continued positive economic data (above expectations) from the US highlighted divergences from the EU with another Summit resulting in little tangible outcome from Europe’s politicians.  China’s data, while appearing more stable, may be hiding serious imbalances in its (closed) financial system. MSCI World ended the month +0.5%, while the EM index was -0.1%.

The ECB’s pre-Xmas long term repo operation (LTRO), which provides low interest 3yr loans to EU banks, pumped EUR489b of liquidity into 500+ banks.  This, together with a similar auction to be held late February, will go a long way to sorting out liquidity issues (potentially staving off a ‘Lehman event’) but will not resolve solvency issues.  Some of this funding will find its way into Sovereign debt, potentially assisting EU nations finance themselves in the short term.

 Infra Regulation:

*Indonesia’s parliament approved a law to speed up government acquisition of land for infrastructure, a step analysts say is crucial to kick-starting construction of needed roads, ports and power plants

Infra M&A:

*3i, Global Infrastructure Partners, Aéroports de Paris and Carlyle are lining up to bid for Edinburgh airport (worth up to GBP500m). BAA, owned by Ferrovial, has been forced to sell the airport by the Competition Commission.

*The Portuguese government announced that China’s Three Gorges have won the bidding for a 21.35% stake in state utility EDP with a EUR2.7bn bid.

*ADIA, the Abu Dhabi Investment Authority, has agreed to buy a 9.9% stake in Thames Water from the Macquarie led consortium.  No price details have been released.

*Natural gas pipeline company HDUF rejected an AUD832m cash & scrip hostile offer from 20.7% shareholder APA Group. Pricing was a 21% premium to the prior 3 month trading price.

Infra Funding:

*RWE (Electric, Germany) announced details to raise EUR2.15b at ~10% discount, to repair its balance sheet ahead of further cost cutting and asset disposals

*EDP’s (Electric, Portugal) retail bond (€200 million, 3 years at 6% yield) was 38% oversubscribed

*Following the decision to put the Eurozone sovereigns on CreditWatch with negative implications on 5 December, S&P announced a list of 26 European corporations that were also on negative watch. The utilities included in negative watch were: EDF, Enel, EDP, REN, Enagas, Red Electrica, Terna, which are stocks that, at different levels, are considered sovereign related entities

Other:

*Saudi Arabia unveiled plans to expand the Riyadh airport  - plans are for four terminals that will raise the capacity from 12m to 24m

*The South Carolina Ports Authority has unveiled a USD1.3b capital plan involving improvements to the port of Charleston over the next 10 years.  The plan includes a new container terminal, as well as major upgrades to facilities and technology

1. TransCanada (TRP): Market Capitalisation US$60.4b        
2. Southern Company (OS USA): Market Capitalisation US$33.6b  
3. American Water Works (AWK US): Market Capitalisation US$5.1m
4. Transurban Group (TCL): Mkt Cap AU$7.5b
5. National Grid PLC (NG/ LN): Market Capitalisation US$34.2b
6. Sydney Airports (SYD): Market Capitalisation A$5.0b
7. Northeast Utilities (NU): Market Capitalisation US$4.1b      
8. Spark Infrastructure (SKI AU): Market Capitalisation A$1.7b           
9. Severn Trent plc (SVT): Market Capitalisation GBP3.6b
10. SES: Market Capitalistion $11.0b  

Click here to read article in full.

1. MAp Airports (MAP): Mkt Cap $6.2b
2. Transurban Group (TCL): Mkt Cap AU$7.5b
3. American Water Works (AWK US): Market Capitalisation US$5.1m
4. TransCanada (TRP): Market Capitalisation US$60.4b
5. Southern Company (OS USA): Market Capitalisation US$33.6b 
6. National Grid PLC (NG/ LN): Market Capitalisation US$34.2b
7. Spark Infrastructure (SKI AU): Market Capitalisation A$1.7b
8. SES: Market Capitalistion $11.0b  
9. Severn Trent plc (SVT): Market Capitalisation GBP3.6b
10. Westar Energy Inc: Market Capitalisation A$3128.73mn 

Click here to read article in full.

The first three weeks of November were characterised by positive fundamental US data (ISM, payrolls, retail sales, consumer confidence), but European Sovereign concerns & continued weaker European economic data (GDP, ISM, employment) weighed on the markets. By the last week of the month, European stocks were down 12% and US down 6% - but a coordinated Central Bank liquidity provision response spurred the market to end close to flat for the month. Optimism once again grew, with pressure on European policymakers to once again come to the rescue – 10 Year Italian & Spanish bond yields hit record spreads over German bunds in November.

 Infra Regulation:

*Ofwat (The UK Water Regulator) released its consultation document on 2015-2020 price limits, with no major surprises

 Infra M&A:

*Hochtief delayed its airports sale again due to the market volatility

*Italy’s Atlantia (tollroad) completed the sale of a 69% stake in Societa Autostrada Tirrenica after receiving approval from regulatory authorities

*Turkey’s TAV Airports was awarded the Izmir airport concession

*National Highway Authority of India (NHAI) awarded 905 kms of road projects in November at  total cost of RS90b. Road awards have moved towards e-tendering — a first of its kind in India – ushering in transparency for awards, something that a lot of stakeholders in the sector have been calling for

*Brazil announced that three airports (Guarulhos, Viracopos and Brasilia Airports), representing ~30% of Brazilian passengers, are due to be auctioned in late December.   The concession periods range between 20 and 30 years, and investment amounts are $R6.2b, R$11.4b, and R$3.5b, respectively.  Potential bidders for the concessions include the listed Brazilian toll road concessionaire’s OHL Brasil (in partnership with AENA International), Ecorodovias (in partnership with Fraport) and CCR  

 Infra Funding:

*Toll-road operator 407 International. raised C$350m from an issue of long bonds maturing in November 2041, issued at 4.45% (170bps over Canada 2041 bonds)

*APRR operating company (French Tollroad) issued EUR500m in 2016 bonds at 275bps over mid swaps. The Eiffarie (French Tollroad holding company) has EUR4b to refinance by June 2013

*Canadian Pacific Railway Ltd is borrowing USD500m to reduce its pension deficit.

*BAA postponed a bond issue (sterling-denominated 12-year subordinated bonds) citing poor market conditions in the Eurozone

*NHAI issued a draft prospectus for a proposed RS100b tax free bond issue

The global equity indexes posted positive returns for the first time in months in October on optimism that the efforts of euro-zone leaders and US and European central bank intervention will ease the European sovereign debt crisis. The rally was aided by US Fed officials signalling their willingness to do further quantitative easing, and on a stronger than expected earnings season and increased M&A activity in the US. The MSCI World index was up 8.6% and MSCI EM was up 9.1% (in local currency with net dividends reinvested). However, the month ended on a negative note as weak macroeconomic data weighed on the market.

In the developed markets, 21 of 24 countries had positive returns in October. The best performing countries were Hong Kong (up 12.3%), Germany (11.7%), and the U.S. (10.9%). More importantly, in the emerging markets, every country except for Turkey and Morocco had positive returns in October. China (+14.9%) and Thailand (+11.2%) were the strongest performers in Asia. Indonesia (+9.2%) and Korea (+8.3%) also performed strongly. LATAM was led by Peru (15.3%) and Chile (10.6%), with Brazil (8.9%) and Mexico (8.5%) lagging. Europe was more of a mixed bag with Russia, +12.9%, and Hungary (+12.5%) leading the way. Turkey fell 7.5%. All returns are measured in local currency assuming net dividends are reinvested.

We continue to maintain a very positive view on emerging markets as a whole. We will see some short term volatility as the global backdrop worsens. However, in our view, company fundamentals remain very compelling on a medium- to long-term investment horizon.  We certainly cannot ignore the fact that near-term earnings for some companies may be impacted, particularly those with a direct link to global trade (especially given the higher operating leverage of these companies). That said, valuations are not rich, and we think will be a key support factor, especially given the high Internal Rates of Return we currently see across the Infrastructure sector, driven strong balance sheets, strong cash flow generation and strong margin expansion. Inflation also appears to have peak and most EM governments have scope to adopt more expansionist policies, if necessary. Across most of our investing universe we continue to expect a smooth deceleration in economic activity.

Further, Infrastructure as a sector is poised to be the greatest beneficiary of the structural drivers of EMs, related to the growth of working age populations and formation of an urban middle class. Fast growing populations and rising urbanisation rates have led to a global shortage of infrastructure services.  For investors this provides a particularly interesting opportunity. Investment in Emerging Market infrastructure provides excellent growth, diversification, and strategic benefits.

There was a broad based rally across risk assets in October from the lows of the year at the end of September. Confidence was improving over the month for an extensive European sovereign and banking bailout package, and when finally released it was largely in line with market expectations. The main results of the Euro Summit were (i) a voluntary 50% haircut for private holders of Greek debt, which would get Greek Debt to GDP to 120% by 2020, (ii) leveraging 4x of the EFSF to 1.4trn USD, (iii) increasing banks core capital positions to 9%, and (iv) accelerating fiscal and structural reform in Spain and Italy in particular.  

 Infra Regulation:

*A German regional administrative court temporarily banned all night flights at the Frankfurt airport until a legal dispute with residents is resolved.

Infra M&A:

*Spain’s development ministry delayed the privatization of its two largest airports (Madrid & Barcelona) by three months, saying bidders have asked for more time to secure financing. Spain is looking to raise more than EUR5b from the sale.

*Capstone Infrastructure, a Canadian Infrastructure Fund, acquired a 70% stake in Bristol Water from Suez Environment.

*Bidding closed for the sale of the Portuguese government’s 21% stake in EDP, with 6 bids received.

*Brazil’s National Agency for Land Transport announced it would be auctioning a 476km toll road. Investors are expected to fund USD1.16b in highway upgrades and USD0.917b in maintenance costs

*Ferrovial sold a 5.88% stake in BAA, the operator of Heathrow airport, to Alinda Capital Partners for EUR325m, valuing BAA at more than double previous market estimates, around 13.7x EV/EBITDA.

*BAA announced that it will put Edinburgh airport up for sale to satisfy demands from the UK Competition Commission. Edinburgh has 9.2m passengers (6% growth over the last 12 months) and could fetch up to GBP600m.

Infra Funding:

*National Grid (UK, Electric/Gas) issued a 10 yr sterling bonds linked to the retail price index (RPI). Grid raised GBP260m from retail investors, with the bonds paying 1.25% over RPI.

*EDF (France, Electric) issued GBP1.25b of new 30yr bonds with a 5.50% coupon.

*Iberdrola (Spain, Multi Utility) issued a EUR600m 5yr bond with 4.75% coupon or 290bp over mid-swap

*Associated British Ports refinanced GBP1.85b bank debt, while a further GBP500m of senior debt is to be refinanced through the capital markets. Pricing starts at 175bps over LIBOR for the five- and seven-year facilities

*NT Airports (Australia) raised AUD350m in three- and five-year senior bank facilities with all in pricing ~7%

Other:

*European Commission unveiled a plan to invest EUR50b to improve Europe’s transport, energy & digital networks. The plan aims to create jobs and boost competitiveness.

1. MAp Airports (MAP): Mkt Cap $6.2b
2. TransCanada(TRP): Market Capitalisation US$60.4b
3. Transurban Group (TCL): Mkt Cap AU$7.5b
4. Vinci SA (DG): Market Capitalisation US$34.1b 
5. Southern Company (OS USA): Market Capitalisation US$33.6b 
6. National Grid PLC (NG/ LN): Market Capitalisation US$34.2b
7. Abertis Infraestructuras SA (ABE): Market Capitalisation US$16.7b
8. SES: Market Capitalistion $11.0b  
9. American Water Works (AWK US): Market Capitalisation US$5.1m 
10. Spark Infrastructure (SKI AU): Market Capitalisation A$1.7b

Click here to read article in full

RARE has a number of investments in airport assets around the world. RARE looks for long term stable financial returns and as a result, RARE has investments in gateway and hub airports.

A gateway airport is typically a country’s major airport with the most number of arriving and departing international travellers. It is usually located in or near the country’s largest city or tourist site and attracts a high number of origin and destination passengers. A hub airport is the nucleus of an airline’s route network and is used as the transfer point to get passengers to their intended destination. They can be major hubs (large airports servicing the bigger airlines as the principal base of operations) and secondary hubs (normally smaller airports in an airline’s network but important for operational and strategic reasons). Secondary hubs can be feeder airports for the major hubs. An airport can be both a gateway and a hub. Paris-Charles de Gaulle, owned and operated by Aéroports de Paris, is an example.      

There is greater financial risk for an airport when a carrier fails and the lost capacity is not filled, particularly when it is a major carrier. This risk was noted by RARE in the article “Qantas Grounding Impact On Investors In Airports”. There are earlier examples, such as the collapse of Ansett in 2001 which saw the withdrawal of Australia’s second largest domestic carrier. In the same year, flag carriers in Switzerland (Swissair) and Belgium (Sabena) also collapsed. While a number of airports were negatively impacted by these failures, some were able to replace the lost capacity faster than others and return to the passenger growth trend sooner. It took two years for domestic passenger numbers at Sydney Airport to recover to the level prior to Ansett’s collapse whereas it took nine years for passenger numbers at Zurich Airport to return to the level prior to Swissair’s collapse.

RARE believes that the operational and financial impact from a failed or distressed airline is less for gateway (origin & destination) and hub airports, such as those owned and operated by many of the listed airport groups. These airports are usually more successful in attracting and retaining a larger number of airlines (diversified customer base), and they have stronger passenger demand characteristics. They are therefore more defensive. If an airline does fail, passengers move to other carriers and another airline usually steps in to quickly replace the lost capacity. Financial risk is higher for airports with a larger proportion of smaller, secondary airlines. It can also be higher for those airports with a greater exposure to any one airline, including flag carriers.

The recent grounding of Qantas aircraft highlights the difficult operating conditions for airlines. Labour is typically an airline’s biggest expense followed by fuel. The ongoing disputes between Qantas, its staff and unions over job security and pay claims come at a time of high fuel costs. There is therefore pressure on the airline’s two largest cost items. The difficult operating environment is compounded by air route liberalisation (promotion of international airline competition, including airlines with access to cheaper capital, fuel and labour), increasing penetration of low cost carriers and slowing worldwide economic growth.     

However, the difficult operating environment for airlines does not translate into similar difficulties for airports. While the grounding of Qantas aircraft had a short term negative financial impact on the airports where it operates, the impact was lower than for Qantas. The overall earnings impact of the grounding on Sydney Airport was estimated at around $0.5m (0.06% of annual earnings), compared with a cost of over $20m per day for Qantas.

The impact on revenues (measured on a per passenger basis) was less at those Australian airports where Qantas operates its own domestic terminal, such as at Sydney Airport. Qantas operates its own domestic terminal (Terminal 3) at Sydney Airport, which is 85% owned by MAp Airports Limited. Passenger-based charges for Qantas domestic services at Sydney are limited to security recovery. In fact, there was some financial benefit for Sydney Airport when Qantas domestic passengers instead travelled with other airlines out of the airport’s other domestic terminal (Terminal 2). Sydney Airport operates Terminal 2 and receives higher passenger-based charges from Virgin, Jetstar, Tiger and regional airlines.

RARE also notes that the risk of another dispute extending further (and possibly leading to a more material impact on airport earnings) is relatively low. The prompt return of Qantas flights to normal three days after the grounding decision demonstrates the importance of the flag carrier to Australia’s economy. The Australian Government stepped in and applied to Fair Work Australia to stop the industrial action, therefore demonstrating that it is prepared to act to maintain the operation and provision of air services

RARE believes that this recent episode highlights the difference between an investment in transport infrastructure (Sydney Airport) and a transport operator (Qantas). In general, the infrastructure asset is less exposed to volatility in the industry and will remain profitable through the market cycle. As such they remain attractive assets for investors looking for long term stable returns, even though their airline customers may sometimes appear anything but stable.

MSCI EM index posted a 7.4% decrease in local currency underperforming the MSCI World (-6.2%).  It was a very volatile month. The tepid pace of global growth coupled with the mounting fear of a Greek default led to global risk aversion, reflected by the VIX increasing by 35.9% MoM.

Further downgrades to global growth continued to have a negative impact on commodity prices, with Brent Crude and the CRB commodity futures index decreasing 9.5% and 13.0%, respectively. This along with slowing global growth has moderated inflation worries in EMs, and for the second consecutive month central banks have ceased their tightening measures or even cut their benchmark rates.

During the month, Hong Kong (HSI Index) was down 14.3% and China (Shanghai) was down 8.1%. The Indian BS500 Index was off 1.6%, the best performing market in Asia. The Jakarta Composite Index and the SET Index in Thailand were off 7.6% and 14.4%, respectively.  Malaysia (KLCI Index) was down 4.2%. In LATAM, Argentina and Chile were the best performing markets. Brazil and Mexico were the worst performing markets.

 As we continue to note, we maintain a positive view on emerging markets as a whole. However, we will see some short term volatility.

In the long term EM’s rising share of global GDP is structural and related to the growth of working age population and formation of an urban middle class. Infrastructure as a sector is poised to be the greatest beneficiary of all the long term trends. Fast growing populations and rising urbanisation rates in Emerging Markets have led to a global shortage of infrastructure services such as roads, rail and electricity, amongst others. This is important because Infrastructure provides the lifeblood for an economy. Countries which invest in infrastructure benefit from faster and safer transportation of goods, functioning of industrial production, improved communication and business activity and more efficient allocation of labour. This leads to enhanced productivity and competitiveness and ultimately results in higher consumption and economic growth. Over the next 20 years demand for infrastructure in EMs is expected to triple to USD1 trillion annually. Asia is expected to account for the lion’s share of infrastructure demand followed by Emerging Europe and Latin America.

For investors this provides a particularly interesting opportunity, given that one result of the global financial crisis has been to create heightened risks and lower returns on traditional asset classes. We believe investment in infrastructure in Emerging Markets provides excellent growth, diversification, and strategic benefits.