CitySpring – BT

CitySpring eyes $370m in equity capital

But the trust would issue equity only ‘if it makes sense’, says its CEO

CITYSPRING Infrastructure Trust is seeking a mandate from its shareholders to raise a further $370 million in equity capital, but may not actually do so if market conditions remain poor, its chief executive Fai Au Yeung said on Feb 4.

‘At the prices today, we will not issue equity,’ said Mr Fai in an interview. ‘We want the mandate to issue equity, but we don’t have to issue equity if it’s not needed’.

The $370 million in proceeds would repay a bridge loan from DBS, which helped finance CitySpring’s $1.6 billion purchase of Australian energy asset Basslink last July.

At an EGM on Feb 19, the trust will seek shareholders’ approval to issue new equity to sponsor and controlling shareholder Temasek Holdings, as well as the trust’s own directors.

If the issuance is successful, CitySpring’s gearing – which it defines as the proportion of debt to total capital – would fall from about 94 per cent today to 62 per cent, said Mr Fai.

On a fully diluted basis, City-Spring’s distribution per unit would rise 16.7 per cent to seven cents for the year ended March 2008, up from the six cents projected in its IPO prospectus last January.

At recent closing prices of below 80 cents – down from $1.58 a year ago – this represents an annual yield of nearly 9 per cent.

The trust would issue equity only ‘if it makes sense’, Mr Fai said.

Debt remains very cheap in Asia, especially for high-quality infrastructure assets, he said; this is truer still for CitySpring, given its parentage and sponsorship from Temasek.

The management is still ‘very comfortable’ with current gearing levels, which gives the trust enough capacity to complete at least one more deal without equity issuance, Mr Fai said. As a trust, unlike a Reit, CitySpring has no regulatory limit on gearing.

But price is only one factor when considering equity issuance, which could help in other ways, said Mr Fai.

As a relatively small trust with a market value of below $400 million, certain investors cannot buy in, while poor liquidity means traders avoid CitySpring when markets are volatile, he said.

A rights issue could boost City-Spring’s market cap, shareholder base and trading volumes, thereby improving price performance, he said.

Despite increasing investor attention and funds getting poured into Asian infrastructure, good opportunities are still available, Mr Fai said.

While there are no more distressed sellers, unlike during the Asian financial crisis, there are still good-quality assets coming through, he said. And CitySpring’s managers have ‘been around infrastructure’ for 15 to 20 years, and ‘have relationships and a nose’ for good deals, he added.

With Basslink, for example, they identified the deal as early as December 2006, before CitySpring was even formed. At the time, the vendor, British utility National Grid, had completed a strategic review and concluded that Basslink was no longer a good fit as it wanted to focus on US and European assets.

CitySpring’s managers contacted the Tasmanian utility that buys power from Basslink, convincing them that it could be trusted with the assets and also add value.

It locked in financing via AAA-rated bonds – at between 3.6 and 5 per cent annual interest, plus cost of financial guarantee – and the DBS loan. Other bidders used syndicated bank loans, which fell out of favour in the subsequent sub-prime crisis, said Mr Fai.

‘We are performing much better than we projected at our IPO, and the poor price performance has been frustrating for management and shareholders, but not deserved’, he said.