The funds management and investment banking community's view of Macquarie Bank in the United States is quizzical - best described as a combination of respect and confusion.
The Australian firm's reputation in the past few years has largely been defined by MIG and the size and visibility of its deals.
This is certainly true for the past couple of long-term leases.
MIG bought the Chicago Skyway in March 2004 and in June this year it jointly purchased the Indiana Toll Road with Spanish infrastructure firm Cintra Concesiones de Infrastructure de Transporte.
The Chicago Skyway and Indiana Toll Road make up 11 per cent of MIG's total portfolio and their purchase increased its exposure to North American assets to 55 per cent.
Its other US assets include a 14-mile strip in Virginia called the Dulles Greenway and a 10-mile road in San Diego called the South Bay Expressway. These sit beside Australian assets, including the Eastern Distributor, M5 Motorway and Westlink M7.
MIG's heavy weighting towards US assets is no surprise considering the growing number of opportunities off Australian shores for infrastructure investments.
"We've been saying for the past two years the US will throw up attractive opportunities. It's a less competitive market than Europe or Australia where these businesses have been operating for a lot longer," MIG chief executive officer Stephen Allen says.
MIG paid US$3.85 billion for a 75-year lease on the 157-mile Indiana Toll Road and US$1.83 billion for a 99-year lease on the 7.8-mile Chicago Skyway.
It is not necessarily the scale of the deals, but the amount by which MIG outbid its nearest competitors that causes most remark.
On the Indiana Toll Road deal MIG's bid trumped the nearest bidder by US$1 billion and on the Skyway deal the second highest bid was US$1.1 billion lower than MIG's.
The most interesting aspect that US institutional investors are trying to wrap their heads around, however, is the way in which Macquarie uses debt to fund its purchases. This was particularly pertinent for the Indiana Toll Road deal.
In a first for infrastructure deals in the US, MIG used debt that increases instead of decreases over the life of the investment.
According to Allen, the bank debt steps up in margins over the nine-year tenure of the loan. Eighty-one per cent of the up-front amount MIG paid for the Indiana Toll Road comprised bank debt, with the remaining 19 per cent equity. Allen says he expects to keep the debt in the equation as planned for the full nine years.
The finance structuring for the Indiana Toll Road deal also involves a step up in interest rates that starts at 3 per cent and increases towards the end of the loan to above market interest rates.
"We're quite comfortable with the level of debt in here. We think it's a good financing package," Allen says.
Macquarie expects to make good on the loans because it has factored in excess revenue it intends to generate by raising tolls quicker than inflation.
It is doing this in an effort to bring the tax on motorists into line with levels charged by tollways around the country.
The levels of debt on the Indiana Toll Road deal are based on the fact the Indiana Department of Transportation has not increased its tolls since 1985.
"The companies around the world we work with are happy to be lending on these sorts of ratios because they are stable and predictable cash flows," Allen says.
Felicity Gates, Deutsche Bank managing director and RREEF Infrastructure chief investment officer, says she is increasingly seeing financing models where debt increases over time.
"Have a look at the amount of debt the winning bidder reportedly used [on the Indiana Toll Road deal] and you'll see it was greater than the entire amount bid by the second bidder," Gates says.
Deutsche's RREEF has recently had its first closing of an equity raising in the UK for a European infrastructure fund.
"Infrastructure assets are long-term investments that involve a lot of assumptions, and it's not yet known if the deals being done at the moment will generate the value paid for them . only time will tell," Gates says.
But there is more to the Macquarie infrastructure story in the US than just the dynamics of MIG's portfolio.
In its 2006 annual review, Macquarie Bank in Sydney highlighted the majority of the firm's growth came from its off shore business activities, and that overseas is where its growth potential lay.
Currently 72 per cent of the property assets and 73 per cent of its infrastructure assets are international, according to the annual review presentation.
"We now have 2,517 international staff, an increase of 44 per cent on the prior year. Our international colleagues now account for 3 per cent of all staff. International income increased by 59 per cent to $2 billion and now accounts for 48 per cent of total revenue," the review notes state.
In North America in the past 12 months acquisitions include two roads, an off -airport parking business, an airport services business, a gas company and a water utility company. It has also bought two roads and three health and aged care facilities in Canada.
Macquarie owns infrastructure assets across Europe, UK and Canada but out of all its off shore businesses, the priority now is leveraging its position in the US.
Towards the end of last month Macquarie Infrastructure Company (MIC), the entity listed on the New York Stock Exchange, announced it had entered into agreements to sell stakes in two UK infrastructure assets specifically to pay off debt of its US infrastructure acquisitions.
MIC sold its 50 per cent stake in the company that owns the Yorkshire Link toll road concession and its 17.5 per cent interest in the South East Water clean water utility.
The proceeds of the sale of the UK toll road and utility, combined with a recent asset sale of part of another UK company, the Macquarie Communications Infrastructure Group, amounts to US$220 million. This will go straight towards reducing part of MIC's existing US$234 million of acquisition-related debt.
Probably Macquarie's most telling commitment to the US to date is the establishment of its first US-owned and domiciled co-investment partner - MIP. It is seeded with equity generated from the recent buyback of $500 million of shares in the Australian Stock Exchange-listed MIG.
MIG is in the process of selling that stake to the US entity - which from a portfolio perspective comprises 50 per cent of its interests in its four US toll roads: the Dulles Greenway, South Bay Expressway, Chicago Skyway and Indiana Toll Road.
The rationale behind the restructure of MIG and the subsequent sale of part of its US assets to the US-based MIP says a lot about Macquarie's commitment to the US, and in particular, the role US infrastructure assets will play in its infrastructure portfolio.
The infrastructure market in the US continues to grow as state governments increasingly pass legislation to allow partnerships with the private sector. Essentially this means selling public assets to investment companies similar to the Chicago Skyway and Indiana Toll Road deals.
"Our business is to some extent opportunistic. Particularly in terms of new acquisitions because we need the government to take some form of action in order to allow assets to become available . so we do have to be willing to respond to new opportunities when they are there," Allen says.
There is no doubt Macquarie is leading the way in the US as the market becomes ripe - and every day there are more established players here looking to follow Macquarie's lead.
Babcock and Brown, another Australian investment firm, is usually part of the bidding chorus for infrastructure assets and was the second place bidder on the Indiana Toll Road.
Established institutional players in the US, including Goldman Sachs and Morgan Stanley - which have been involved on the investment banking side as advisers on many of these deals - are reported to be raising money to start competing with Macquarie.
US institutions are generally less familiar with transactions that involve owning the assets for decades, but they are watching with interest what Macquarie is doing, particularly in terms of structuring finance on its recent tollway deals.
"We got into this business in the early and mid 1990s and one of the first thoughts we always had was that our competitive advantage comes from having good structuring skills," Allen says.
There is another issue that has reared its head during the two recent infrastructure deals and has the potential to affect Macquarie's presence in the US - the debate over foreign ownership of US public assets.
In recent months there has been a growing voice which has questioned the sell-off of American roads, transport systems and utilities to foreigners.
Indiana Governor Mitch Daniels even penned an op-ed piece that ran in The New York Times following the sale of the Indiana Toll Road in an attempt to allay some of the locals' concerns about the deal.
"While every business group, building trades union, and local government organisation of consequence weighed in with support, the animosity in Indiana was as genuinely grassroots as it gets," Daniels says.
"Many Hoosiers [an Indiana native or resident] convinced themselves either that our proposal borrowed from the future, or that it gave away a part of America to foreigners.
"The economic case is ironclad. Indiana has scored a multibillion-dollar financial gain. And the reflexive patriotism that saw this transaction as a loss of control has it backward: in a world competing for globally mobile capital, repatriating $4 billion that Americans spent on Sonys, Audis, or, in my case, Foster's beer, to put Hoosiers to work is not a loss but an emphatic win."
Macquarie hopes to avoid any unnecessary future criticism by buying US assets through MIP - another one of the key reasons it gave for starting the US entity.
While Macquarie in the US has convinced itself and its lenders that the financing models it applies to its infrastructure deals are sound, and place Australians at the forefront of the world in doing business in this sector, there are still some that argue the level and way it uses debt makes the model unstable.
There is still no definitive answer from Allen, for example, as to how rising fuel costs will affect toll road revenue estimates.
Those that criticise the Macquarie model will point to the drop in MIG's net profit at its recent full-year results from $772.6 million in the previous corresponding period to $424.7 million as at August 2006.
But the true test will be if the next decade's revenue forecasts are met and loans are paid back as on assets like the Indiana Toll Road.
