Directory of Innovative Financing: Australia

Australia

Project Title: M2 Toll Road

Country: Australia

Issue Amount: US$475 million (A$644 million)

Sector: Transport

Sponsors: The New South Wales Road and Traffic Authority

Concessionaire: In 1994 Hills Motorway Limited (HML) won a concession to finance, design, construct, maintain and operate the road for a concession period of between 36 and 45 years. HML was originally formed as a consortium of two construction companies, Australia's Abigroup Ltd. and Japan's Obayashi Corp., and was later enlarged to include other partners. Macquarie Corporate Finance acted as financial advisor, with Westpac Banking Corp. as debt arranger.

Customer: Motorists on this 21km, six-lane expressway in Sydney's fast-growing Northwest sector.

Financing Package: Highlights include: a) initial equity raised through an A$155 million Australian Stock Exchange public offering that raised funds for an equal number of shares in HMT and units in Hills Motorway Trust, the sole borrower in the construction and project loan packages and the only issuer of the bonds; b) HMT's issuance of A$200 million of debt in two tranches of inflation-adjusted 27-year bonds, priced at 1.75% over Commonwealth 2010 inflation adjusted stock and carrying project risk post completion; c) A$365 million reducing to A$120 million post completion, 15-year syndicated bank loan;  d) A $30  million  in   additional  sponsor equity to be injected on completion of construction.

Innovation: M2 is the first Australian infrastructure project to tap directly into the institutional market to raise equity and project risk bonds. It was also the first time toll road risk had been syndicated successfully in the bank market. Its bonds mark the first time the country's pension funds have invested in such infrastructure debt issues without the protection of government revenue streams. Contractors Abigroup and Obayashi bear construction risk through a fixed-price, fixed-term design and construction contract.

Like the project bonds, toll revenues will be inflation adjusted, allowing cash flows to be correlated to liabilities. Having long-term, inflation-adjusted bonds improves the equity returns in the project through lower debt service repayment obligations, especially in the first years of operations.

Brief: Australia's New South Wales government turned to the private sector to finance the M2 Motorway when it found that it would not able to finance it itself for the foreseeable future.  Unlike earlier privately financed infrastructure projects in the country such as the Sydney Harbour Tunnel or the M4 and M5 toll roads, the M2 relied heavily on two innovative features: publicly issued equity and long-dated inflation-adjusted bonds bearing project risk.

Infrastructure and Financial Markets Division
Private Enterprise and Financial Markets Subdepartment
Sustainable Development Department
Inter-American Development Bank

Last updated: 02/26/07