The A$10.3 billion ($7.1 billion) financing for the acquisition of the 99-year lease of New South Wales electricity distribution company TransGrid by a consortium led by Hastings Fund Management was the largest financing to close in Asia Pacific last year, edging out the $6.6 billion financing for the underground expansion of the Oyu Tolgoi copper and gold mine in Mongolia. Both deals signed in December, marking an unusually frantic last few weeks for project finance bankers before the New Year. 

The TransGrid deal was comparatively straightforward having moved from expressions of interest (EOI) phase to financial close within a period of six months. Australia has an established track record in privatising large state-owned infrastructure assets although none so far have been on the same scale as TransGrid. The deal made light of the theory that the banking market would not be able to absorb an asset of TransGrid’s size without tapping Chinese lenders or alternative forms of funding. 

“The big challenge in the Australian market is the depth of the liquidity” said John Schembri, partner at Gilbert + Tobin. “Each of the banks in this transaction signed up to very large debt pieces and although there is likely to be some sell down it’s not a syndicated deal. Having banks committing half a billion dollars each is unprecedented and what is more remarkable is the fact that the sponsors were able to achieve this without all of the Australian banks present on the deal.” 

First out of the block 

NSW Premier Mike Baird appointed UBS and Deutsche in 2014 to study the feasibility of leasing 49% of the state’s electricity transmission network assets to the private sector. The 49% figure represents the average level of government ownership across all assets. In addition to the 100% sale of electricity transmission operator TransGrid, New South Wales plans to sell 40.4% stakes in electricity distributors Ausgrid and Endeavour Energy, while it has said it will maintain full control of Essential Energy.

The NSW government opted to tender out TransGrid first, the most attractive of the three assets up for sale, and pulled in seven bids. The seven bidders were:

• Hastings Funds Management, Spark Infrastructure, the Abu Dhabi Investment Authority, Caisse de Depot et Placement du Quebec, and Kuwait Investment Authority subsidiary Wren House
• IFM Investors and Queensland Investment Corporation
• AustralianSuper, Canada Pension Plan Investment Board and Borealis Infrastructure
• China Southern Power Grid and Global Infrastructure Partners
• Cheung Kong Infrastructure Holdings
• State Grid Corporation of China and Macquarie Infrastructure and Real Assets
• AusNet

The NSW government then cut the number of bidders to four with the Hastings, IFM Investors, AustralianSuper and State Grid Corporation-led consortiums remaining. It then asked for best and final offers in November before awarding the lease to the Hastings consortium on 25 November. The final price was higher than many analysts had initially expected representing a multiple of almost 1.6x the regulated asset base.

Financing with international lenders

Hastings and its consortium partners reached financial close on the acquisition on 16 December, which comprised A$5.881 billion in senior debt and A$4.419 billion in equity. The sponsors and their shareholdings in the project company were as follows:

• Hastings (20.02%)
• Spark Infrastructure (15.01%)
• The Abu Dhabi Investment Authority (19.99%)
• Caisse de Depot et Placement du Quebec (24.99%)
• Wren House (19.99%)

The debt financing comprised a A$1.939 billion three-and-a-half-year term loan, a A$1.939 billion five-year term loan, a A$621 million seven-year term loan, a A$1 billion two-year bridge facility, a A$350 million three-and-a-half year capital expenditure facility and a A$50 million revolving credit facility. All of the debt has a bullet repayment profile and is likely to be refinanced in the capital markets at some stage. The deal priced at below 200bp over BBSY.

12 banks lent under the deal and were granted mandated lead arranger status. The 12 banks were:

• Australia & New Zealand Banking Group
• Commonwealth Bank of Australia
• DBS Bank
• Export Development Canada
• HSBC
• JP Morgan
• Natixis
• Bank of Nova Scotia
• Royal Bank of Canada
• MUFG
• United Overseas Bank
• Westpac Banking Corporation

First of its kind

The TransGrid project is one of several large privatisations in Australia in the last few years – including the A$5.07 billion Botany and Kembla deal and the A$1.75 billion Port of Newcastle – where the price exceeded even the most optimistic predictions. And with the NSW government asking bidders to submit offers for AusGrid by 29 February the early indications are that the competition is expected to be fierce for the next phase of the ‘poles and wires’ privatisation.

But TransGrid also remains a one of a kind since the coalescence of a number of factors led to the competition being especially fierce. The surprise result in Queensland’s state election last year, which led to the Labor party winning office on an anti-privatisation platform, and the fact that TransGrid is the most treasured of the three transmission and distribution companies to be privatised in New South Wales, probably helped push bids higher than the A$9 billion price tag that was forecasted.

Even if the tender for AusGrid proves less successful than TransGrid the real lesson from the deal is that the international bank market has sufficient depth to finance the acquisition of even the largest infrastructure projects in Australia. Partly because international banks active in Asia so often struggle to find viable projects to finance, TransGrid goes to show that their appetite for well-structured deals in creditworthy jurisdictions is largely insatiable.

UBS, Deutsche and Allens Linklaters advised the government. RBC, JP Morgan and Herbert Smith Freehills advised the sponsors. Gilbert + Tobin advised the lenders.