Spanish infrastructure operator GlobalVia is looking for roughly Eu500 million ($690 million) in financial equity to pursue road and rail bids in anticipation of an eventual initial public offering. GlobalVia, a joint venture of FCC and Caja Madrid, has hired JP Morgan and Macquarie to advise on the process, and according to chief executive Juan Bejar, is targeting pension funds, insurance companies and other institutions. GlobalVia was careful to avoid specifying a timeline or target commitment, the deal could close in the first half of 2011.

According to Bejar, GlobalVia wants to pursue brownfield transportation assets that produce an internal rate of return in the 10% to 15% range. GlobalVia ranks second globally, after ACS, in number of PPP concessions operated, but has made very limited headway in markets such as the US, Canada and UK. Bejar, who joined GlobalVia from Citi Infrastructure Investors in 2009, needs to make the case that asset valuations are tempting for a brownfield investor, but at the same time get a rich valuation from the new equity investors.

Bejar’s pitch boils down to the assertion that debt markets, and traffic levels, are both rebounding fast from recent lows, but that public equity markets will take more time to value GlobalVia properly. According to Bejar, generic asset valuations have dropped by 35% – of those 35 percentage points 20 percentage points can be blamed on banks offering sharply lower asset leverage (a 3% increase in IRRs accounts for another five percentage points of this drop and a 10% decrease in Ebitda another 10 percentage points).

Debt markets, suggests Bejar, are recovering, indicated by a return to Eu500 million underwriting commitments from banks for solid infrastructure assets. Bejar offers the example of the UK’s offshore transmission deals, the EDF transmission sale, and recent rail tenders as evidence. GlobalVia is among the bidders on the A9 availability road concession in Germany, and Bejar says that it was able to line up 150% of its debt requirement for its statement of qualifications.

But debt market conditions are still far from ideal, with, “margins still stubbornly 300bp above pre-crisis levels”, says Bejar, and underwriting appetite for demand risk is still very limited. Bejar, by calling on the UK government to extend the regulated asset base approach from water and airports to any road or rail privatisations, and praising Chile’s variable-length NPV-based toll road regime, which benefits from minimum revenue guarantees, is acknowledging this.

Bejar believes there may be opportunities to buy secondary stakes in roads with promising fundamentals, particularly in the US. This approach has the virtue of involving assets that already benefit from debt financing, although some US toll concessions are struggling in the face of weak revenues, and as Bejar notes, many US assets come with refinancing risk: GlobalVia was part of a shortlisted consortium for the Presidio Parkway concession in California, but did not submit a bid.

“Recovery in the infrastructure sector depends on a recovery in the syndication market, and we see promising signs, though we are not experts at judging the depth of this market,” says Bejar. At the same time, Bejar sees a very limited role for the bond market in financing GlobalVia’s portfolio. “There are maybe three or four assets that are large enough and mature enough to support bonds, but we would not like to majority bond-finance any asset because getting waivers from bond investors is difficult. We saw that during the process of restructuring the Chilean toll concessions.”

The Chilean example involved taking a set of assets with nominal exposure to demand risk and stripping them of this risk. In return, however, sponsors accepted a cap on their return, and lenders went through months of negotiation, sometimes involving bondholders, monolines, sponsors and government. Bejar believes that such a process might be useful in Europe, particularly for roads where ramp-up was interrupted, and in some cases profoundly disrupted, by the crisis.

There is likely, however, to be limited government appetite for such contingent commitments from government. Investors may not take well to such a drastic curtailment of their upside, even if the alternative is default. Cintra, the road operator where Bejar worked during the Chilean restructuring, is in the process of selling stakes in the Chilean projects to Colombian transmission operator ISA, which appreciates, in a way that few toll road investors might, the predictability of their cashflows. GlobalVia wants to keep its emerging market – even investment grade emerging market – exposure to roughly 15%.

Bejar’s other two big hopes are for an end to government demands for fully-underwritten early-stage bids, and increased use of periodic re-basings of infrastructure concessions. “We like the way that government has in some instances only required a fully-underwritten bid at the final stage. It is difficult to mobilise bank resources when every bidder that wishes to qualify must assemble a full bank group.” Asked whether banks’ practice of assigning separate teams internally to support bids, or trees, is an acceptable solution, Bejar replies that “any solution that tries to create artificial demand can only increase costs.”

The UK’s approach to periodic tariff adjustment excites more enthusiasm. Thirty years is the right length of time to recoup infrastructure investment, but a long time to forecast infrastructure needs. Government should look every 5-10 years at whether infrastructure is adapted to market needs. An approach that uses weighted cost of capital and regulated asset base to determine charges can be communicated to lenders and has worked in airports and water.” Bejar hopes that it might be adapted to any toll road assets the present UK government sends to market.

Much as GlobalVia wants to be a controlling shareholder in its infrastructure concessions, FCC and Caja Madrid will probably retain control of GlobalVia after any equity sale, if only so as not to trigger change-of-control covenants in its project financings. Bejar, without naming names, claims a positive response to the initial stages of the equity-raising. With a 93% concentration on brownfield assets, GlobalVia can claim a much lower exposure to development and ramp-up risk than its peers. But breaking into markets such as the US and Canada, where business development costs are high, will call for a more risk-embracing approach. n