"We're suffering from a brain drain," laments one Sydney banker, reflecting the wave of enthusiasm in Europe for institutional and listed equity involvement in infrastructure.

An Australian accent may be a plus in financing infrastructure in New York or London, but political tussles have characterised the market in Sydney, the spiritual home of the listed toll road operator.

The entry of the Cross-City Tunnel into receivership shows the unfortunate results of a flawed traffic study coupled to a flawed concession agreement. But it does not signal an end to the innovation in the Australian market. Not only are several of New South Wales' neighbours, foremost among them Queensland, still active, but federal opportunities are still available, and elections in New South Wales could also create dealflow, depending on the victors.

Cross-City crisis

To recap briefly (and the story is recounted almost nightly on Sydney's radio talk programmes), the Cross-City Tunnel experienced severe difficulties in reaching predicted traffic levels in the months following its opening. Drivers cited high toll levels and competing routes, the second of which the state attempted to rectify. This sparked political controversy, which rumbles on in New South Wales.

The project was financed in March 2003 with a A$580 million ($470 million at today's rates) seven-year project loan from Deutsche Bank and Westpac, on which the concession defaulted on interest payments in December 2006. The project is now in receivership, sponsors RREEF, Bilfinger Berger and Cheung Kong have written off their equity, and banks will now have to work out a restructuring: The 2.1km tunnel, which runs East-West across the city, is the subject of a 33-year concession.

There is still a slate of plausible toll road projects in and around the city, including several that would link up the city's suburbs. Probably chief among them are the M4 East, the M2-F3 connector, the F6 Connector and the upgrade of the Pacific Highway. The three top the list of priority projects submitted by Infrastructure Australia, a developers' lobbying group. Of the three, the M4 East has the best chance of going forward, because it was shelved in the aftermath of Cross-City, because it would complete the Sydney ring road, and because it might support a real toll financing.

The recent, resounding re-election of the state's Labor Premiere, Morris Iemma provides cautious optimism to toll road proponents. The Labor party has not been completely inimical to toll road concessions, and may return its attention to the subject once back in office. But the squabbles over the Cross-City Tunnel were among the reasons for Labor's twitchy poll performance in the months leading up to the election. The Pacific Highway upgrade for instance, could go forward using grants from the State or Commonwealth.

Queensland quickens

The highest profile financing of the year came from NSW's northern neighbour. The Brisbane North South Bypass Tunnel (NSBT) was awarded and negotiated with the Brisbane City Council rather than the state of Queensland. The 5.8km concession, which includes a 4.8km tunnel, is almost twice as long as Cross-City, and financed using a large bank group. It also looks set to spawn a quick follow-up – the Brisbane Airport Connector – for which the adviser on NSBT, Ernst & Young, has been retained.

The key feature of the 45-year concession is the presence of a substantial revenue cushion in the form of a cash contribution of $503 million from the council. This will be contributed in stages, and is anticipated using a loan of the same size from the lead arrangers, ABN Amro, Calyon, HSBC, National Australia Bank and WestLB. Rounding out the financing is a A$155 million equity bridge, and a A$1.336 billion construction loan.

The project's sponsors are ABN Amro, Bilfinger Berger, Leighton Contractors, which opted to sell equity in the project to a listed vehicle, River City Motorways. The sale proved disappointing, and several bankers active in the market have suggested that future sponsors are much more likely to concentrate on approaching or raising unlisted funds.

But the wider lesson of the financing is that financings for real toll road in areas with promising demographics, and with strong support at the most local political level (or support from "the most immediate stakeholders", as one arranger put it) can still amass a bank following. The NSBT margin, at 140bp, was a little higher than bank deals from the surrounding period, but several of these were refinancings, and a small premium was to be expected after the Cross-City debacle.

Big projects stretch appetites

Moreover, liquidity in the wider debt markets is still strong. Two borrowers outside of the roads sector in New South Wales made strong showings in the start of 2007 – the Reliance Rail PPP project and the Sydney Airport refinancing. Of these, Reliance was the more interesting contractually, although Sydney was an impressive feat of debt distribution.

Reliance reached commercial and financial close in December 2006, and syndicated at the end of February 2007. The A$2.257 billion in debt breaks down into A$1.8 billion in senior bonds, A$100 million in junior bonds, and A$357 million in senior bank debt. XL Capital and Ambac insure all of the tranches equally. Westpac, National Australia Bank, Mizuho Corporate Bank, and SMBC were the arrangers of the bank debt, while ABN and Citigroup underwrote the bonds' synthetic CPI tranche, and ABN Amro underwrote the non-index-linked tranches.

The financing backs the provision of 624 new rail cars to Railcorp, the NSW-owned rail operator, under a 37-year concession. The manufacturers of the rolling stock are Downer EDI and Hitachi, while Downer, ABN Amro, Babcock & Brown Public Partnerships and AMP Capital Investors are providing the project's equity. The project is notable in blending such a variety of sources of debt, for having a wrap on the junior bonds (rated BBB-/Baa3 (S&P/Moody's), the senior debt was A/Baa1), and in the size of the inflation-linked element.

Reliance is a one-off, the result of a tortuous and close-run tender process, where the NSW government oscillated between single-deck and double-deck trains. The Downer-led consortium narrowly beat out competition from Star Transit, made up of United Group and Mitsubishi Electric. The level of local manufacturing that the winning bidders could offer also swung the bid, although governments looking to copy the process will be unlikely to squeeze out greater savings by opting for foreign content.

While Reliance stands out as a benchmark for rail procurement, as a debt raising it took place in the shadow of Sydney Airport's refinancing, which also closed in December and syndicated earlier this year. Sydney is a much more familiar credit, since it has been financed twice before, but was a much greater feat of coordination and digestion. (For more on both deals, search for "Reliance Rail" and "Sydney Airport").

The A$4.3 billion ($3.4 billion) Sydney Airport debt was spread across medium-term notes, both floating and fixed, as well as some index-linked debt, and a new type of convertible security, known as SKIES. The debt featured wraps from FSA, MBIA and Ambac, and an arranging group that was little changed from the airport's 2004 refinancing.

M&A fury unabated

The greatest reason why slower toll road and PPP volume has left the bank market unfazed is the rate at which operational assets have changed hands. Some of these involve substantial new borrowings and the potential for further disposals. The recent activity suggests that while listed equity may not work for greenfield assets, the prices of securities in the operators of existing assets have not suffered.

On 14 December 2006, Transurban, which has interests in the Westlink M7 and Hills Motorway M2 in Sydney, and CityLink in Melbourne, agreed a A$1.4 billion merger with Sydney Roads Group (SRG). SRG, which Macquarie spun off from Macquarie Infrastructure Group in July 2006, holds stakes in the M4 West. The combined entity would control the majority of the tolled sections of Sydney's road network, and while the Australian Competition and Consumer Commission (ACCC) has expressed concern that the merged entity would have a dominant position in negotiating the roaming agreements between electronic toll road operators, it did not block the move.

As of the ACCC approval, which came through on 8 March 2007, Transurban had received acceptances from 25% of SRG's shareholders. On 23 March, Transurban extended its offer from 30 March to 16 April. Transurban has offered to pay for SRG either with Transurban shares (1 for every 5.7 SRG shares), or in cash, up to a total cap of A$500 million. It is funding this commitment with a bridge loan from Citigroup of $500 million.

Citi is also among the three arrangers of a A$5.2 billion ($4.1 billion) loan for Toll Holdings' de-merger of its infrastructure assets, and was, along with UBS, an adviser to Toll. The borrower, currently titled Infrastructure Company, will be a listed trust formed to hold the port and rail assets of Toll Holdings, which recently bought Patrick Corporation.

Toll first proposed the acquisition in August 2005, and encountered initial opposition from the ACCC, which filed suit in February to stop the deal, but reached a settlement the following month that mandated the sale of several of Patrick's businesses. The ACCC is now considering a variation to this agreement, whereby the restructuring of the infrastructure assets into a separate vehicle would allow Toll to avoid selling 50% of Pacific National, the rail operator with a dominant position in East-West freight.

The infrastructure vehicle would own Patrick Ports as well as Pacific National. It would be the subject of a A$4.5 billion term loan, which would be divided into three-year and five-year tranches, a A$600 million three-year capex loan and a A$100 one-year working capital facility. In an impressive instance of title inflation, the deals' bookrunners are Citigroup, NAB Capital, Royal Bank of Scotland, Westpac, ANZ, ABN Amro, BNP Paribas, Calyon, Commonwealth Bank of Australia, Societe Generale and WestLB. Of this group, the first four are understood to be actually managing the process.

Alinta opens up

But the most closely-watched takeover is the battle for Alinta, which owns seven power plants, all of which are gas-fired, manages the trust that holds interests in four gas pipelines, several distribution businesses, a Western Australian energy retail business and a wind farm. Alinta, originally simply the retail business, was privatised in 2000, has expanded rapidly, most significantly with the acquisition of Duke Energy's assets in 2004 and the Dampier to Bunbury Natural Gas Pipeline later that year.

Alinta received a proposal for a management buy-out in January, with Macquarie briefly playing the role of adviser to buyers and target, as well as a potential rival bidder. The ensuing controversy over the purchase, which involved substantial criticism of the company's management and Macquarie, forced Alinta to itself up for sale. Macquarie and Babcock & Brown led the two highest bids for the group.

The bid from B&B, in association with Singapore Power, has won the recommendation of the Alinta board, although it would lead to the dismemberment of Alinta, and the dispersal of its constituent parts between SingPower and the various funds managed by Babcock & Brown. The A$15 per share bid is in the form of A$8.50 in cash, and 7.83 Babcock & Brown Infrastructure securities, 3.31 Babcock & Brown Power securities, 1.30 Babcock & Brown Wind Partners securities and in-specie distribution of 1.51 Australian Pipeline Trust units for every 5 Alinta shares held.

Put broadly, B&B's power fund would take over the Alinta generation assets, while SingPower will take over most of the distribution assets and B&B Infrastructure most of the pipeline assets. The B&B funds have indicated that they would largely pay for the acquisition with the issue of new shares, although the infrastructure fund will also call on a A$450 million corporate revolver. Singapore Power, which was advised by Morgan Stanley, has not yet laid out a financing scheme, but ratings agencies have indicated that it could be downgraded without a coherent plan to digest the assets.

But both Babcock & Brown and SingPower have established energy operations in Australia, since the latter was one of the Asian buyers that profited from the hasty withdrawal of the US energy majors at the start of the decade. SingPower has long wanted to expand its portfolio in Australia, and B&B, while spending an increasing proportion of its energy in North America, can be relied upon to bid for most assets that come up to bid.

Peter Hofbauer, B&B's head of infrastructure recently compared its bid with that of Macquarie by noting that it could only be made accretive through aggressive leverage and synergy targets. The Macquarie offer, at $15.34, was slightly higher, featured a higher potential cash component, and had the support of Alinta's ousted former management. But the remainder of the offer, and the 100% default option if an Alinta shareholder did not express a preference, would be in shares in a more leveraged New Alinta.

Macquarie is asking that the independent board of directors reassess its bid, and notes that the formation of a new Alinta might protect some shareholders from capital gains tax, but the takeover tussle represents a good proxy battle between B&B's lower-leveraged model and the more aggressively debt-financed Macquarie approach. Given the past success of the Australians in exporting financial structures to markets elsewhere, the battle is worth watching.