Any infrastructure investor can be broadly categorised as one of three types: an aggressive financial investor like Macquarie with a focus on quick dividends from maxing asset leverage; a pension fund passively reaping stable long-term yields and spreading portfolio risk; or an investor from a construction and operational background, such as Ferrovial, with a focus on lifetime ROI. The Indian corporate GMR, and its international subsidiary GMR International, originate from the operational camp.

Headquartered in Bangalore, the GMR Group has grown from a family-run agri-business to a global infrastructure major with interests in airports, energy, highways and urban infrastructure. The company has nine power projects in India, three in operation and six under development, and six road projects of which two are in operation and four under development (see box). In the airport sector, it recently completed and commissioned the Hyderabad airport and the group is developing a new 40 million passenger per year terminal in Delhi.

A new type of infrastructure investor?

The increasingly cheaper cost of capital in the pre-credit crunch cycle encouraged many infrastructure investors to increase leverage and refinance to boost returns – in effect the lines of distinction between different types of investor became blurred: for example, Ferrovial became a frequent user of aggressively geared financings; Macquarie Airports has a band of operational experts hired from airport companies; and Ontario Teachers has become proactive at individual asset level.

Some investors are now witnessing the fallout from overleveraging and too much reliance on financial engineering. The share prices of Babcock and Brown, Macquarie and Ferrovial have had a torrid time as investors fret over leverage, refinancing risk and the inability to sustain high growth in tighter credit markets. Babcock in its recent results announced that is was continuing with its policy of deleveraging through asset sales and is reverting to its roots of concentrating its core business on development assets.

GMR International's CEO Ranjit Murugason is quick to point out, "We are not a financial investor. We develop and operate assets, we put in place a full management team at project level and we start from an operating model. We don't look at assets with a view to an exit, so in that regard we are like a pension fund but seek a significantly higher recurring return. GMR is expert at project management so we bring value in design, developing and operating a project. The emergence of GMR International's business could signal a new type of infrastructure player."

Murugason is spearheading GMR International's push and has set up an office in Portman Square, London. Murugason was formerly global head of infrastructure at ABN Amro. He is looking to supplement his project and corporate financing expertise with five senior appointments, such as CFO, Head of Energy and Head of Airports. The hires will be managers from a predominantly operational background. The group CFO of GMR, Madhu Terdal, has joined GMR International as COO and Jerónimo Roura joins from Abertis as Head of Structured Finance.

Ranjit Murugason, CEO of GMR International

"It is important that we send out the right message to our partners and stakeholders by establishing an office in London," says Murugason. "Nearly all infrastructure transactions and financings pass through London, it is the pre-eminent financial centre and I believe it is the place to be to launch a global infrastructure/developer/operator/business. We spend a lot of time and effort identifying talent. London allows us access to opportunities and talent, whereas it would be more difficult if the international headquarters were in Dubai or Singapore."

Energy and airports

The GMR International division is primarily focused on two sectors, energy and airports. "There is a huge demand and supply gap in these sectors which offer up large opportunities," says Murugason.

Asia, Eastern Europe and the former Soviet states are likely to be hunting grounds for GMR. Eastern Europe needs to add around 40GW to its existing capacities in the next few years, and Russia and the former soviet states need over 100GW by 2020.

In the airport sector, the 10 major East European countries require a 75% capacity expansion by 2015. And the former soviet states and Kazakhstan have greenfield opportunities of over $20 billion.

GMR's first airport investment outside India has been made in Turkey. GMR is leading a consortium that is upgrading and operating Istanbul's Sabiha Gocken International Airport with a new 10 million passenger terminal. Murugason used his close relationship with ABN Amro to help secure the financing. ABN Amro acted as adviser and arranging bank on the deal. Airport operations were taken over on May 1 2008 and financial close took place in June 2008.

Lead arranged and underwritten by ABN Amro and Yapi Kredi, a 13.5-year Eu336 million debt package backs development of a new international and domestic terminal at Istanbul's second airport. The 20-year concession was awarded to a consortium comprising GMR (40%), Limak (40%) and Malaysia Airports Berhad (20%), whose bid for the project was Eu1.93 billion over the life of the concession. Syndication of the debt launched at the end of August.

Intergen

The 50% Intergen acquisition is GMR's second international transaction after Istanbul's Sabiha Gocken International airport, and firmly cements GMR as a player in the global power market.

AIG Highstar sold its 50% stake to GMR of India for $1.1 billion, with the remaining 50% stake owned by Ontario Teachers' Pension Plan. The acquisition is the largest ever of a global independent power producer by an Indian corporate. It gives GMR a half-share of an operation portfolio with a gross capacity of 8,258MW, a 4,822MW development pipeline and operating assets in the UK, the Netherlands, Mexico, Australia and the Philippines. The price paid for the stake per kW is $360, which is half the current cost of building greenfield capacity.

Intergen's management team will remain intact following the acquisition and GMR's role in the day-to-day management of the company will be minimal. The deal is expected to be rubberstamped in the third quarter of 2008. GMR therefore had no say in the recent Rijnmond 1 and 2 financings in the Netherlands.
GMR is financing the acquisition by drawing on a committed corporate line of credit from Indian lender Axis Bank. Joining the lead underwriter, Axis Bank, are Canara Bank ($200 million), Bank of India ($200 million), Bank of Baroda ($150 million), Indian Bank ($25 million), with the remaining $525 million funded by Axis Bank.

"The reason we funded the acquisition entirely from India," says Murugason. "Is both because of the speed with which the deal was put together and because the international and especially New York markets were effectively shut."

There are at least another three banks interested in participating, ICICI Bank, Syndicate Bank and Indian Overseas Bank – and are likely to take up a portion from Axis Bank.

It is expected that once normality has returned to the Libor market, the corporate financing will be refinanced by international banks.

Out of India

Given an estimated $1.6 trillion infrastructure investment is required within India in the next 10 years, why is GMR going global?

The answer is partly because of the gulf between the promise of a cascade of deals and the reality – for example, the government has stalled on tendering for the 35 secondary airports, power projects have been delayed by legal challenges to the pre-qualification procedure and the allocation of coal due to state and central government conflicts, and roads have been affected by competing transport projects originated at different levels of government and land acquisition issues – but more significantly because the Intergen acquisition enables GMR to qualify for the ultra megawatt power plant (UMPP) tenders in India. GMR had previously failed to reach the minimum criteria of 1,000MW installed capacity.

GMR has also successfully expanded its asset base in India; it had to turn down the Mumbai airport concession because its consortium chose to develop Delhi, and for competition reasons it could not develop both. However, global expansion allows it to take advantage of other markets offering emerging market returns and avoids an over reliance on India at a time when India is grappling with double digit inflation, high interest rates, restrictions on capital inflows and high bank cash reserve ratios.

"The aim of our international expansion is to diversify more and to achieve high returns whilst managing risk," says Murugason.

There is little reason why GMR should not be able to successfully apply its model outside of India. One of GMR's key advantages compared with many of its peers is that it does away with the need for expensive EPC contracts by acting as the EPC contractor. This is a particularly powerful advantage in the current contractor market, where top EPC contractors can pick and chose which projects they work, with capital cost inflation soaring – particularly in the Middle East and in other areas with a high engineering workload.

For example for the Sabiha Gocken airport in Turkey, GMR and its partner Limak are running the Eu330.86 million EPC contract. The sponsors have set up a management team of around 120 people which will tender over 50 separate construction packages, most of which will be executed locally. Murugason stresses the importance of good project managers. GMR has appointed Roland Meredith ex-Halcro joint project manager at Sabiha Gocken.

For the Hyderabad airport, the CEO and Chairman of GMR's airport division sat on the construction company and went through the project's management and finances weekly. It is this attention to detail and credibility from providing a project on time and under budget that Murugason believes will give GMR the edge. "We are a different brand of development and operating company. We have a good, singular development model and an integrity of approach that we can take to other countries."

A further example of GMR's ambition and operational expertise is its 220MW barge-mounted naphtha-based power plant, the largest floating power station in the world. The plant, which was commissioned in 2001, was serving two distribution companies on the West coast of India at Tanir Bavi near Mangalore. In June 2008 the seven year PPA ran out so the barge is being transported to the East coast of India to Kakinada to run on a merchant basis.

Leveraging and debt

In the last 18 months GMR has raised project finance of $400 million for Hyderabad, $1.2 billion for Delhi and $530 million for Istanbul airports and raised a $1.1 billion corporate loan for the Intergen acquisition. While the risks of over-leveraging are lower post credit crunch, aggressive expansion using a mix of non-recourse debt and short term corporate facilities is risky as Babcock & Brown and others will attest.

GMR plans for an overall investment in new projects of around Rs 40,000 crore ($8.95 billion) over the next three to five years; according to its annual report it is "exposed to huge risk on this account." GMR is also exposed to interest rate risk especially in the refinancing of its short term loans. However, with efficient project management and timely completion of projects these risks can be managed. It is also expected that Indian inflation will subside to allow monetary loosening.

GMR is building a successful track record of development and operation. A developer that does not become overly reliant on financial engineering and one that is not beholden to EPC contractors makes a compelling investment story. It would appear GMR's growth into global markets is more than good timing.

GMR Asset Spread

 

 

GMR operational highlights '07-08

• Won a competitive bid to develop the Sabiha Gokcen International Airport at Istanbul, Turkey, along with consortium partners, Limak and Malaysia Airports Holdings Berhad.

• Delhi International Airport achieved financial close, raising Rs4,940 crore (including ECB of $350 million) from a consortium of 12 banks for funding the capital expenditure for the first phase development of the Indira Gandhi International Airport.

• Commissioned the greenfield Rajiv Gandhi International Airport at Hyderabad on 23 March, 2008.

• GMR Hyderabad International Airport received approval from the Board of Approvals for its two special economic zones (SEZs) of 250 acres each. While one SEZ is a multiproduct based, the other relates to aviation sector.

• Won a competitive bid for the development of 300MW Upper Karnali, Nepal, Hydro Project on 30-year concession.

• Acquired 80% stake in Himtal Hydro Power Company Private Limited, Nepal, which has rights to develop 250 MW Hydro Project on Marsyangdi River on BOOT basis.

• The capacity of Badrinath Hydro Power Project, currently under development, has been increased to 300MW from 140MW.

• Executed pre implementation agreement with Government of Himachal Pradesh for setting up of 180MW Baidi Holi Hydro power project on BOOT basis.

• The 1,050MW coal fired Kamalanga Project in Orissa has secured its fuel sourcing requirements through a coal linkage as well as coal block allocation from Ministry of Coal, Government of India.

• Acquired 10% equity stake in Homeland Mining and Energy SA, (HMESA), South Africa with an option to acquire an additional 40% equity. HMESA owns three advanced development/pre-development stage coal projects in South Africa.

• Acquired a 50% stake in Intergen which operates 8,258MW of installed capacity across four continents and is further developing power projects aggregating to 4,822MW.

• Entered into an MOU with Tamilnadu Industrial Development Corporation for the development of a 3,300 acre multi product SEZ in Krishnagiri District of Tamilnadu.