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Will Transurban ever pay back its debt?

Transurban, a toll-way operator in Sydney, Melbourne and the US has accumulated a debt mountain of around $A4 bn. Up to now, most of the previous debt, when due, was re-financed. There can be no doubt that Transurban’s accountants and financial planners were very skillful in doing this job. After all, they survived the 2008/09 crisis. Here is a debt profile:

transurban_debt_profile_by_maturity_2003_2020

Click to enlarge

Disclaimer: Great care has been taken to develop this graph, but some minor details have been omitted, e.g. deferred borrowing costs. No responsibility can be taken for its accuracy. Its sole purpose is to alert the reader to this debt problem. It is strongly recommended the reader tries to re-create this graph with his/her own calculations. Then, and only then, will it be understood what the true situation is. All data are publicly available at the Transurban web site.

 What we see:

 (1)   The debt mountain has reached around $ 4bn

(2)   Overall, debt has not been paid back, but refinanced (major refinancing events are marked Ref)

(3)   The debt pyramid (in red) which has to be refinanced is clearly visible

(4)   The refinancing is done for longer periods to avoid early capital repayments

(5)   The repayment problem is pushed into the future

This rolling over of debt has continued recently, when Transurban obtained a bank loan of $A740 m for the M2 widening in Sydney:

Transurban finds $ 740 for M2

20/11/2010

TRANSURBAN, the country’s biggest operator of toll roads, has signed $740 million of loans to finance the long-awaited upgrade of the Hills M2 Motorway in north-western Sydney.

The company has obtained four- and six-year non-recourse project financing from the Commonwealth Bank, NAB, the Bank of Tokyo-Mitsubishi, Credit Agricole, Scotiabank Group and Sumitomo Mitsui Banking Corporation, it said in a statement to the ASX yesterday

The cost of the improvements are expected to be $550 million. Yesterday’s funding includes the re-financing of $465 million of existing debt and $275 million of new debt

http://www.brisbanetimes.com.au/business/transurban-finds-740m-for-m2-20101119-180yc.html

Refinancing $ 465 million? Where does that amount come from and what are the details? In the Financial Report 2009 on page 97 we find this description:

Term debt

The facility comprises non-recourse Syndicated Bank debt entered into by the Hills Motorway Trust and Hills Motorway Management Limited of $465 million (less capitalised borrowing costs of $7.3 million), with terms of three years ($290.5 million) and five years ($174.5 million). This facility refinanced the term debt that was due to mature in June 2009 (refer note 19).

This facility is secured against the respective rights of Hills Motorway Ltd and Hills Motorway Trust in the Hills M2 Motorway and their assets.

Therefore, $ 290.5 m were due by June 2012 and $ 174.5 m by June 2014. So apparently a pre-mature refinancing was done at more favourable conditions. If that is the case, the remaining $ 275 m is not enough to complete the M2 widening job.

And how about the equity part of $ 275 m for the M2 widening mentioned in the ASX press release? Equity of $ 530 m was raised for the purchase of the Lane Cove Tunnel and “other growth opportunities”. But the Lane Cove Tunnel cost $ 630 so that transaction came at a loss of $ 100 m. Moreover, $ 300 m of non credit wrapped fixed rate bonds become due in September 2011, right when contractor bills for the M2 widening roll in.

No matter how you look at it, the numbers don’t add up.

Therefore, there does not appear to be any intention to pay back debt in the foreseeable future. In fact, the next debt for the M5 widening  is already around the corner. Or will there be yet another capital raising on equity markets?

But there are more worrying, deeper questions about the medium and long term financial viability of Transurban:

(1)   When will Transurban actually pay back all that debt in the medium to long term?

(2)   Is toll-revenue sufficient to pay back debt?

(3)   What will happen in the next credit crunch?

On question 1:  Given that the combination of financial crisis and peak oil will severely limit the paying capacity of motorists, in a worsening trend, the chance that Transurban’s debt will ever be paid back is diminishing with every year.

On question 2 let’s do a back-of-envelope calculation how the debt could be paid back, over a 20 year period, for example. That would require a capital repayment of $ 200 m every year. Revenue from tolls is in the order of $ 800 million pa. Therefore, tolls would have to be increased by around 25% in order to pay back the debt. That is impossible, even without peak oil.

And shareholders also suffer from the debt problem in that interest payments reduce the dividends they receive, not to mention that the share value drops with higher debts. As shown in a previous post (link below) distributions to shareholders have already peaked in 2008.

Moreover, Transurban sits on deferred tax liabilities of  $ 901 m

 On question 3:  The next oil crunch is calculated by Chris Skrebowski to be around 2012, just when the M2 widening project opens for traffic.

  megaprojects_skrebowski_aspo_usa_2007_2015

In all likelihood that will trigger another credit crunch with more problems for re-financing.

And what’s the general outlook for the growth area of Asia?

By 2015, 12 million motorists in Australia will have to compete with 70 million new motorists in China. Who is going to win the race for oil?

Conclusion: A business which does not want to or cannot pay back debt, has paid decreasing distributions to shareholders, has tax liabilities and all that in the context of a rsiky oil supply situation is financially not viable. Therefore, the M2 and M5 widening is financially not viable. Then also long-distance commuting by car is financially not viable. In fact, the whole Metropolitan Strategy which is based on toll-ways is not viable. This in turn means that settling new immigrants in Sydney is also financially not viable.

Unless there is an immediate moratorium on new toll-way developments and a crash program to use the toll-way corridors for public transport great financial and economic damage will result.

But the opposite is happening as a vital bus ramp is being pulled down as shown in the previous post.

Related research:

 22/11/2010     Yet more debt to finance Sydney’s tollway expansion
http://www.crudeoilpeak.com/?p=2255

 9/11/2010     M2 widening increases Sydney’s oil vulnerability
http://www.crudeoilpeak.com/?p=2039

 28/10/2010    Quick risk analysis for M2 widening (Part2)
http://www.crudeoilpeak.com/?p=2012

 21/9/2010    RTA fails to present business case for M2 widening (part 1)
http://www.crudeoilpeak.com/?p=1886

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