Macquarie's £790 million ($1.561 billion) purchase of the off street business of UK car parking group NCP has netted the vendor 3i a profit of £235 million in just 18 months.

While the structuring of the £500 million ($1 billion) debt backing Macquarie European Infrastructure Fund II's acquisition shares similar structural features to the financing backing 3i's acquisition, the business models of 3i and Macquarie are very different. 3i, a private equity house, looks for exits within 5 or 6 years whereas Macquarie's model is to buy and hold. In this sense the NCP deal highlights the increasing and divergent competition for low risk and high yielding infrastructure assets and how that competition is resulting in large capital gains.

3i's disposal effectively splits NCP in half. Macquarie has bought the car park, off street side of the business, while the on street service business is being re-leveraged by 3i. In a similarly structured deal to Macquarie's acquisition, RBC lead arranged 3i's £555 million purchase of the whole of NCP in September 2005.

RBC, also the initial mandated lead arranger for the latest deal and seemingly now something of a car park specialist, has brought in two other lead arrangers on a three-way split of the debt: Bank of Scotland and Mizuho. Although some of the banking market winced at the valuation Macquarie paid for NCP at 18x EBITDA, lenders can take comfort from the 40% equity, strong covenant package and the quality of the underlying asset.

The foundation for NCP's success stems from the shrewd acquisition of bomb-hit sites in London following the Second World War. Within the past 10 years, as the demand for infrastructure assets has ramped up, NCP has changed hands four times. US company Cendan bought the business in 1998 for £805 million and subsequently sold at auction to private equity house, Cinven, for £820 million in 2002. Cinven released some of the company's capital through a sale-and-leaseback of more than 100 car parks, in a deal that raised £600 million. Still, 3i shrewdly picked up the whole business for £555 million in 2005 and has hived off the faster growing services business while disposing of the car park business to Macquarie for a 45% return.

Off street NCP comprises 850 car parks with average leases of around 25 years. It is a robust asset with good brand recognition, valuable leases at airports, rail stations and city centres, with high barriers of entry to competitors. The company also has a JV with Manchester City Council for parking in the city.
NCP has over 50% market share of privately operated off-street car parks in the UK; it is the largest provider of car park services to airports; and is the largest provider of car park services to railway stations. The debt is therefore backed by predictable and stable cashflow.

The £500 million senior debt equates to just under 10x EBITDA and comprises a £425 million 7-year term loan, £50 million capex facility and a £25 million revolver. The debt pays 150bp over Libor and steps up to 175bp in years 6 and 7.

The covenant package imposes a tight schedule on the borrower with incrementally tightening net debt to EBITDA and coverage ratio targets imposed – these can be met by increasing earnings or lowering debt. If a target is not met a lock up covenant is triggered preventing dividend distributions and cash sweeps kick in. Under the schedule, by year 5 the debt to earnings should be a reasonable 6x – at which time, given the step up in margin, Macquarie is likely to refinance.

The high-growth traffic services business is being re-leveraged by 3i through a recapitalization. NCP Services includes enforcement services, clamping and removal and penalty charge processing. The £150 million re-leveraging facilities comprise an £85 million term A and B loans, a £20 million second lien term loan and £45 million capex and revolver facilities.

Though the on-street deal was to launch into syndication by the end of May, it has come to light as Project Finance goes to press that 3i has hired UBS to assess its strategic options, which will likely involve a trade sale. Syndication is therefore postponed and may be avoided altogether. The business is expected to raise about £250 million, with Apcoa, a European car park services business, likely to be an interested party.

The NCP traffic services business has been embroiled in trade union disputes, with the GMB in particular riled by what it views as asset stripping and the enormous profits made by 3i – a bullet that Macquarie must be glad it has dodged.

There are uncorroborated reports that an emanation of Macquarie bid for NCP in 2005 against 3i but lost. This would not have been MEIF II – it closed its first funding round of Eu615 million in 2006.

Given Macquarie's business model of acquiring infrastructure assets with a long-term investment horizon the bank has benefited from the infrastructure boom. Escalating asset values, cheaper bank debt, management expertise and financial engineering have helped Macquarie achieve an average annualized return on its infrastructure investments of 20%. However, with competition for assets getting fiercer such healthy rates of return will come under downward pressure.

MEIF II aims to raise commitments of Eu3-4 billion and to assemble a diversified portfolio of eight to 15 assets. Its most notable investment to date, besides NCP, is its stake in Thames Water.

NCP (off street)
Status: Reached financial close, general syndication scheduled to close by the end of May
Description: £500 million acquisition facilities backing Macquarie's £790 million purchase of NCP (off street)
Borrower: Macquarie European Investment Fund II (MEIF II)
Mandated lead arrangers: Royal Bank of Canada; Mizuho; Bank of Scotland
Legal counsel to lenders: Linklaters