Wednesday, November 26, 2014

Macquarie Laughing All The Way To The Bank Over Indiana Toll Road Bankruptcy

The Streetsblog recently provided a three-part series authored by Angie Schmitt and Payton Chung dissecting the massive private investment in public infrastructure projects like Macquarie's losing $3.8 billion investment in the Indiana Toll Road to explain just how the company manages to make money even when projects like the ITR lose so much money. As it turns out, the ITR loss was just a blip on the screen for the bank and financial services firm which has almost $400 billion under management currently. Macquarie and its partner on the ITR deal, Ferrovial, only had $374 million of their own money at risk. The other billions invested in the ITR came from seven European banks, six of which ultimately had to be bailed out by their respective governments.

Naturally, Macquarie set up a separate subsidiary which shielded the massive Australian-based company from liability for the ITR's losses. At the time it borrowed the money for the ITR, it used a form of balloon mortgage known as an "accreting swap," which offered a low, teaser interest rate. Macquarie assumed it would quickly refinance the debt until the 2008 economic collapse. The resulting higher interest rates that kicked in without a refinancing available is the reason the debt owed on the ITR was more than double the amount it had originally borrowed to close the transaction with the state of Indiana in 2006.

According to the Streetsblog analysis, Macquarie knew going into the ITR deal like other infrastructure projects in which it has invested there was a great risk of the business deal turning sour. Because of a complicated mix of fees and tax breaks associated with the project, investors like Macquarie stand to benefit even when the deal goes sour. Macquarie flips its infrastructure purchases into separate corporate entities that are sold to investors as "income trusts." According to Streetsblog, investors like income trusts because they offer higher returns than bonds, and companies like them because tax laws generally exempt them from paying corporate income taxes.

One analyst the Streetsblog quoted said Macquarie had a "perverse incentive to overpay for its assets" and likened the company to a Ponzi scheme. That's because Macquarie pays itself "handsome annual fees" fees to manage its multiple satellite companies. To encourage investment in their toll road projects, companies like Macquarie rely upon traffic forecasts that invariably are way too rosy, which is precisely what occurred in the case of the ITR. The companies which provide these traffic forecasts are often promised future business opportunities, which critics say result in "statements of advocacy rather than unbiased projections."

Streetsblog sees the ITR bankruptcy as the proverbial "canary in the coal mine" that should serve as a warning to the American public. Because of failures like the ITR, companies like Macquarie are now being forced to craft deals that shift the risk to the public when the traffic forecasts and revenue projections for toll roads fail to live up to expectations. This is precisely what is happening with the Illiana Expressway project the states of Indiana and Illinois are preparing to undertake jointly. The investors in that project are protected when traffic or tolls fail to meet expectations. Illinois and Indiana have pledged "availability payments" to backstop any revenue shortfalls, which will siphon money that would otherwise be available for highway projects elsewhere around the state.

While the primary focus of the Streetsblog series is on toll road projects, the authors think the warning should apply to the increasingly popular P3 deals, which aren't all that they are cracked up to be. "Though made in the name of innovation and efficiency, private finance deals are often more expensive than conventional bonding, threatening to suck money from taxpayers while propping up infrastructure projects that should never get built," the Streetsblog says. State and local officials in Indiana would be well-advised to heed their warnings.


Anonymous said...

And when was the Grand Jury to convene...or shall?

Pete Boggs said...

Taxpayers are routinely, insidiously & unknowingly (without appropriate, express consent), dealt into rigged games of high finance; schemes with payoffs to "elite" operators & ethically foul, recirculating loops of campaign finance...

Flogger said...

Decades ago I took College Courses in Finance (Analysts), Banking, and Accounting. Bottom line we were assured there was the so called "Chinese Wall" between these various disciplines. This supposedly served as Checks and Balances on our system. You can then add in the Regulatory Agencies at the Federal and State Levels.

Way back then you had a certain degree of Trust in the System as whole. This all seemed to change with the advent of Junk Bonds, Management Fees, Corporate Raiding, Mergers, Golden Parachutes, etc. The "Chinese Wall" became paper thin or even punctured by Congress and Presidents. The long term look at a Corporation's viability in the future was replaced by the short-term, and pumping up the Stock Price.

My wife worked for one these companies that went on a buying binge (Mergers). The end result was bankruptcy for her company and the eventual dumping of the Legacy Pensions onto the Pension Benefit Guaranty Corporation (PBGC). The Sweet Deal for the Reckless Banks is the knowledge that the Tax Payers will bail them out. The revolving door between Government, Regulators and the Finance Industry is Strong Nuclear Force that binds it altogether.