Sub-underwriting syndication is now underway on the A$2.23 billion ($1.34 billion) Western Sydney Orbital project, the last of the sections of the ring road around Australia's commercial capital. The deal will be a stern test of bank appetite and exposure levels in the Australian infrastructure market. However it has already led to a refinement of the innovative hybrid security template that has characterised sponsor Macquarie Infrastructure Group's recent financings.

The four sponsors of the WestLink Motorway Partnership are Macquarie Infrastructure Group (MIG, 40%), Transurban Group (40%), Leighton Holdings (10%) and AbiGroup (10%). The New South Wales government bid out the road concession in August 2001, received bids in March 2002, and named WestLink as preferred bidder in November 2002. Commercial close, as well as financial close and underwriting, occurred in February 2003.

The West Sydney concession is a 39km road that runs from the Hume Highway/M5 road at Prestons in the south to the M2 at West Baulkham Hills to the south. The 4-lane road could save 65 minutes in journey time over the length of the road. It will serve the growing commuter population in the western suburbs of the city.

Leightons and AbiGroup will be carrying out the construction contract, with a fixed price of A$1.543 billion and a term of 42 months. The contractors are encouraged to complete work early through a profit-sharing mechanism, will each sell a 5% effective interest to the larger sponsors, and cannot sell their stake for five years, subject to first refusal by the other two.

Transurban brings considerable experience of electronic tolling, the designated technology for the closed system, which resembles the Canadian 407 system, rather than the City Link concession. The tolls are set at 25 cents per km and are adjustable for inflation. The sponsors expect a 70% usage of the technology after three years.

MIG brings its financial advisory skills to the group, as well as the fact that it has a stake in all of the other Sydney ring road concessions. It holds 50% of the M5, 50% of the M4, and 8% of the M2. Macquarie tries to hold stakes in the concessions that offer the highest growth potential. The Cove Lane tunnel, for instance, did not meet its targets well enough for it to offer a competitive bid.

For MIG, a publicly traded fund that has said that the project will offer it an internal rate of return of 13.78%, assuming a 10-year Commonwealth Government Bond rate of 5.19%. It also needs to avoid the drag on equity that typically occurs before traffic has ramped up to its forecast levels. To do this, it had to invent a new type of convertible security to fund the equity contributions for itself and Transurban.

This has been accomplished through the issuance of reset preference securities called Convertible Adjusting Rate Securities (CARS). Keen observers of Macquarie equity issuance, will notice a theme emerging ? those raised for the Sydney Airport deal were known as FLIERS. These act as subordinated debt that would convert to shares in the sponsors at a set point following ramp-up. Transurban issued A$378 million of these to institutional investors, and a further $52 million to the retail market. Macquarie has secured its equity through a placement to the Ontario Teachers Pension Plan Board.

The new securities are believed to be considerably cheaper than the FLIERS ? 250bp over the 5-year swap rate rather than the 400bp on the FLIERS. MIG will receive interest at 250bp over the 3.5-year swap rate, a 7.3% coupon as compared to that of 7% for the CARS-holders. The issue has been well received, and is currently trading at a premium to its issue. The bonds can be converted into MIG securities at a 7.5% discount, and were run by Macquarie Equity Capital Markets and Salomon Smith Barney. 99% of this equity will be in the form of a shareholder loan, with only the remainder in pure equity.

The structure has a strong incentive towards a refinancing further down the line. The interest rate is hedged initially, but tapers off into the life of the debt. The hope for the sponsors will be a refinancing along the lines of that recently completed by Transurban in the bond market.

The bank debt, nevertheless, has a 15-year term, and its lead arrangers are RBS Australia, WestLB, National Australia Bank and Bank of America. This group has held roadshows on the A$1.25 billion loan to local, regional and domestic institutions. The bank debt takes the form of a 3.5-year construction loan, followed by an 11.5-year term loan. The reason for this tenor, despite the imminent likelihood of a take-out, is that banks would prefer to see some amortization. 25% of the loan is a bullet repayable at maturity.

In syndication, the arrangers are looking for a A$120 million lead underwriter commitment, for a A$100 million hold, and a A$90 million underwriter take with a $75 million hold. Fees offered are 90bp. The debt is priced at 150bp over the BBSY in construction, and then 170bp-200bp over the life of the loan.

The deal is the last of the major road projects in Australia in which Macquarie will take a major role. It will now focus its attention on assets in OECD countries elsewhere, including the United States (see Deals and Developments, this issue).

WestLink Motorway

Partnership

Status: Closed March 7 2003, in syndication

Size: A$2.23 billion

Location: New south Wales, Australia

Description: project financing for 38km road in Sydney suburbs using electronic tolling

Sponsors: MIG (40%), Transurban (40%), Leighton Holdings (10%), AbiGroup (10%)

Equity: both MIG and Transurban funded through CARS convertible preference securities, plus $100 million equity bridge each for Leighton and AbiGroup

Equity underwriters: Macquarie, Citigroup

Debt: A$1.25 billion

Tenor: 15 years

Lead arrangers: RBS Australia, WestLB, National Australia Bank and Bank of America

Lawyers to the borrower: Mallesons

Lawyers to the lenders: Allens