Macquarie International Infrastructure Fund

[Qiaofeng]

Nick, Weijian, KM,
Plse refer..

http://www.macquarie.com/dafiles/Interne...o-2011.pdf

Look at PDF slide 10, plot of discount to NAV.
a) NAV (Dec07) was SGD 1.28
b) NAV (Jun11) was SGD 0.8
Ratio of a/b is 0.625, i.e. 37.5% NAV was destroyed due to inept management.
As a FoF, a fund managing investments/ allocation to the sub-funds, U expect that MIIF would buy low and sell high. Not the case.
W/o share buybacks, the discount to NAV was 76%, with share buybacks discount to NAV dropped to 22%.
Buying back 5% of outstanding shares cause a >50% reduction in discount to NAV.

Nick,
The plot shows beyond doubt that with share buyback, the Mkt Shr Price and hence Mkt Cap rose.
Ur discussion on valuation following share buyback is based on EMH (Efficient Market Hypothesis) and that mkts are rational. If they are, there will be no discount to NAV!!
Mr Mkt decided, what U and I (Value Investors) think are sometimes immaterial.
The truth of the matter is that mkts are driven by emotions i.e. behavioural economics . Read Schiller & Taleb.
IMHO, sharebuy backs are good if U have a strong biz franchise making good profits coupled with excess cash hoard and no better way to use that cash in biz growth. It then makes sense for a strong management at the helm to justify buying their own shares as they believe that doing so will create value for shareholders-- reduce outstanding shrs will raise higher.
Not in MIIF case, when the biz model is impaired and the cash is really meant for biz acquisitions.

Nick, KM,
As Nick pointed out, MIIF is Net Cash at the fund level but at the asset level, the fund is geared.
This is as it should be. Gearing in not necessarily bad. Certain bizs require commensurate gearing to give even better returns, provided the debt profile and risks are properly hedged.

MacQ Group pioneered the infrastructure (infra) biz model.
Buy good almost riskless infra bizs such as broadband, toll roads, tankage etc with good (almost guaranteed) operating cashflows and pay good divds from that cashflow. The high Capex at the front end is financed by a mix of funds (loans and equity from MacQ affiliated entities). By use of SPVs (Special Purpose Vehicles) the debt is non-recourse at the fund level; supposedly insulating the investors in MIIF from the debt taken by the funds/assets that MIIF invests in.

So far so good, the biz model worked for many years until the GFC.
Shorts (Chanos etc) smelled a rat and started attacking the mother MacQ and associated entities. With the mother in siege and funds tight, a liquidity crunch ensues and the MacQ affiliated entities could not roll over their debt upon maturity. As in Arqiva, they sell at distressed prices.

So while debt may be non-recourse; to avoid collapse of MacQ related entities, MIIF acquiesced to the sale of assets like Arqiva and CAC -- translated into the 37.5% destruction of NAV on MIIF.
An additional point about the MacQ biz model is the highly criss crossed complex and opaque nature in which the SPVs and the various funds hold stakes in each other biz and is difficult to trace on the B/Ss.

So the transition to an Asian based asset owning biz model is simpler and more transparent.

Weijian,
Ur hope is in MIIF staying as a divd play.
Accepted.
If U buy at low price, during the GFC, the divd yield looks good; and if the current spate of problems are resolved and MIIF turns around, U get share price appreciation and divds; provided MIIF does not become a value trap, as I explained.
But from a biz model point of view, the change from being a FoF to being a 100% owner of assets may mean that the non-recourse nature of debt is no longer applicable. Miaoli debts are 100% MIIF debts.
That they failed in due diligence at the Miaoli windfarms is appalling!!

Hence, I think that a management change is overdue.

[Nick]

Management fees are based on market capitalization. Share buy backs will raise the share price but does it mean it will raise the market capitalization ?

Basic rules of supply and demand mean that when demand is stable, as supply goes to zero, prices go to infinity. But demand is NOT stable, in fact buy-backs temporarily INCREASE demand. So more demand, less supply, prices go up. If trading liquidity is limited the effect is even more pronounced.

In an efficient market, buy-backs would have no effect whatsoever. But since the stock market is NOT efficient, buy-backs do have an effect. If a company with $500m market cap and $500m of equity only trades $1m of stock a day, the company can easily boost its share price by buying an extra $500k of stock a day. This consumes resources at 0.1% a day, but can easily raise the share price 1-2% a day (since demand is now 50% more than normal).

After 10 days the company has used up $5m and bought back 1% of stock, but if it has raised the share price 5%, the market cap is now 0.99 * 1.05 * 500 = ~$520m. On paper it has "created shareholder value" of $20m. This can't work indefinitely since resources are not infinite. But it can help boost the share price temporarily, especially when the general market is dropping.

In the case of MIIF, the management gets paid more for a higher market capitalization and they are penalized for holding cash. Therefore the logical thing to do is to execute buy-backs which can potentially improve market capitalization and definitely reduce cash. Two birds with one stone. Even if the market is not rational, the MIIF management apparently is.

If MIIF caused a temporarily increase in demand and prices, wouldn't there be an increase in the supply of sellers to take advantage of the Company's generosity hence negating any potential benefit ? If people found it attractive to sell at $500 million valuation, isn't it logical to conclude that more will find it attractive to sell at $520 million valuation since the company's cash had declined (ie less valuable as before). This would drive the market valuation down and possibly even lower since even the 500 million mark wasn't as attractive as before. If the company demand isn't as great as the selling demand, the valuation will collapse. Similarly, in this case, MIIF market capitalization declined by over 17% since the share buy back started. It only accounted for 17% of the trade transaction. I think many took advantage of the strength in demand to divest their shareholdings. Either way, I think it is a good move for unit-holders since there is hardly any point leaving the cash alone in the bank when it can be used to purchase stock and boost the absolute DPU value. Personally, I wished MIMAL would disclose the financial statements of each of the 4 assets separately.

[weijian]

hi Nick,
i took some time (figured out the maths) to look at the model u had (1-2 pages ago) and u r right! Sharebuyback is nv market cap positive, whether is there a market re-rating of dividend yield or discount to NAV, considering a rational market.
Although in the short term as d.o.g mentioned, markets can be not efficient, but in the long run, it is. As we r all sceptics (me included despite been vested), we have debated 2 pages' worth of mgt's apparent true cynical intentions of sharebuyback.. Maybe mgt really has good intentions...haha

my 2cents worth here (i believe some others have similar conclusion)
- There is no incentive for MIMAL to recycle assets nor capability to do so anymore - for whatever hypothesises others hv already provided.
- To show it is bringing value AND increasing mgt fee, share buyback looks to satisfy the best of BOTH worlds in the short run.
- It needs to get back the market's confidence by continuing been prudent and proves its dividend sustainability (can it still provide 5.25cents/yr beyond 2014 where TBC starts repaying its debt again?), until the day it can resume its asset recycling strategy again..hehe

---

Personally, I wished MIMAL would disclose the financial statements of each of the 4 assets separately.

besides its AGM, shareholders get invited for its 1H and FY presentations. I will take a note to ask whether this is possible (most prob some time in March2011 when it announces FY2011 b4 AGM)

---

Personally, MIIF in 2011 is radically different from MIIF in 2008. The power doesn't lie in MIIF Boardroom any more after the change in strategy. MIIF can't influence the Fund as it did before. The days of asset trading is over. Power now lies in the Boardroom of TBC, CXP and HNE. How these three assets perform will determine the Fund's fate.

nice conspiracy theory?
actually i do not understand what do u mean by 'MIIF can't influence the Fund as it did before' ?
i mean, the manager is MIMAL, it belongs to Mac group and it determines MIIF's strategy. Since MIIF controls majority stakes in TBC/CXP/HNE, according in AR2010, John Lawson Stuart (CEO of MIMAL) sits on the board of those 3 entities as well!

---

Weijian,
Ur hope is in MIIF staying as a divd play.
Accepted.
If U buy at low price, during the GFC, the divd yield looks good; and if the current spate of problems are resolved and MIIF turns around, U get share price appreciation and divds; provided MIIF does not become a value trap, as I explained.
But from a biz model point of view, the change from being a FoF to being a 100% owner of assets may mean that the non-recourse nature of debt is no longer applicable. Miaoli debts are 100% MIIF debts.
That they failed in due diligence at the Miaoli windfarms is appalling!!

Hence, I think that a management change is overdue.

hi Qiaofeng,
i agree with all of ur observations/comments with the exception of below:
(1) The majority of price increase (causing narrowing of NAV discount) came from the general market recovery since March2009, esp fears that Mac group wasnt going bankrupt subsisided. Sharebuyback started in Mar2011, slide10 shown that since that time, it barely moved, instead price went down! (i suspect this is because ppl who previously bought in, hoping for some immediate cash back from its 37cents/share cash hoard were disappointed it wasnt going to give a special dividend). Therefore, share buyback did not cause share price and market cap to rise.

(2) Based on the prudent way that Mgt has handled its 37cents/share, i have the thumbs-up for its performance in the past 2 years. In fact, if it had continued its asset recycling, i would hv sold out (whether is it a loss or profit), since it doesnt meet my 'dividend play' criteria anymore.

[Nick]

nice conspiracy theory?
actually i do not understand what do u mean by 'MIIF can't influence the Fund as it did before' ?
i mean, the manager is MIMAL, it belongs to Mac group and it determines MIIF's strategy. Since MIIF controls majority stakes in TBC/CXP/HNE, according in AR2010, John Lawson Stuart (CEO of MIMAL) sits on the board of those 3 entities as well!

Hi Weijian,

I guess my choice of words were poor haha !

Previously, MIIF created value through asset trading (which ran contrary to their stated objectives of long term investments). MIMAL purchased minority stakes in infrastructure assets and sold them 2-3 years later at huge profits. Asset Divestment History - http://www.valuebuddies.com/thread-843-p...ml#pid7480 This created huge book value growth and shareholders were rewarded with phenomenal distributions since the excess profits from capital gains (and leverage from borrowings at Fund level) were used to purchase new investments. They bought minority stakes in large assets and I guessed they hope to sell in the medium term at a profit. In other words, value was created (and subsequently destroyed) by MIMAL directly by their active portfolio management via capital and debt. The individual manager in each of the investments didn't impact much directly since MIIF diversified its assets and held minority stakes (no control). They will eventually find out how disastrous this will be.

Since 2009, they became more cautious and halted the asset trading policy. Instead, value in the form of book value growth and distributions were tied directly to the performance of the 3 core assets. For example, MIIF unitholders will only benefit if TBC value appreciated or its distribution increased and this rest upon TBC Management's ability to grow its business and market share in the long run. In other words, value isn't being created by MIMAL directly anymore since they don't run it directly (though they sit on the Board). How the Management of TBC, CXP and HNE fares operationally will determine the Fund's fate.

Previously, I would be more concerned with the Management ability to buy low sell high or finding opportunities in distressed markets or using debt to buy new investments or making opportunistic bets etc. But these days, I would be more concerned about how is TBC performing or how is the traffic volume in HNE etc since these assets are funding the dividends. Hence, I would say that MIIF value rest on the underlying assets and their future prospects as opposed to MIMAL's ability to under-take active portfolio management (like in the past).

[Qiaofeng]

hi Nick,
my 2cents worth here (i believe some others have similar conclusion)
- There is no incentive for MIMAL to recycle assets nor capability to do so anymore - for whatever hypothesises others hv already provided.
- To show it is bringing value AND increasing mgt fee, share buyback looks to satisfy the best of BOTH worlds in the short run.
- It needs to get back the market's confidence by continuing been prudent and proves its dividend sustainability (can it still provide 5.25cents/yr beyond 2014 where TBC starts repaying its debt again?), until the day it can resume its asset recycling strategy again..hehe

---

hi Qiaofeng,
i agree with all of ur observations/comments with the exception of below:
(1) The majority of price increase (causing narrowing of NAV discount) came from the general market recovery since March2009, esp fears that Mac group wasnt going bankrupt subsisided. Sharebuyback started in Mar2011, slide10 shown that since that time, it barely moved, instead price went down! (i suspect this is because ppl who previously bought in, hoping for some immediate cash back from its 37cents/share cash hoard were disappointed it wasnt going to give a special dividend). Therefore, share buyback did not cause share price and market cap to rise.

(2) Based on the prudent way that Mgt has handled its 37cents/share, i have the thumbs-up for its performance in the past 2 years. In fact, if it had continued its asset recycling, i would hv sold out (whether is it a loss or profit), since it doesnt meet my 'dividend play' criteria anymore.

I agree with the statements in bold.

For the statements underlined, my response is....

OK, so shr prices did not actually rose on that chart.
But, if U look at MIIF daily charts from Mar 2011 to today.
U will see the shr buyback pushed prices from 0.525 to 0.620, dropped to a low of 0.46 in the present crisis and rose back to 0.5/0.49 today.Would that have happened w/o the buybacks?

IMHO, the share buybacks definitely help prevent the shr price from falling further vs NAV, then w/o. Hence, preventing Mkt cap from faliing further as during GFC. Concerning the plot, maybe my choice of words were not accurate.
In the GFC, the max discount to NAV was 76%.
In the current Eurozone sovereign debt crisis (add US debt crisis), the max discount is at 42% (0.46 vs NAV 0.79).


Compared with buybacks, the cash is better reserved for deployment in acquiring more accretive infra plays which is what the MIIF biz model is about.

The effect of the buybacks maybe temporary in a prolonged Eurozone debt crisis where fundamentals don't matter in Mr Market's mind; so management should NOT spend time defending that shr price.
That they do so is negative and again I blame the fees incentives scheme as self serving (MIMAL) rather than pro-shareholders.

[Nick]

hi Nick,
my 2cents worth here (i believe some others have similar conclusion)
- There is no incentive for MIMAL to recycle assets nor capability to do so anymore - for whatever hypothesises others hv already provided.
- To show it is bringing value AND increasing mgt fee, share buyback looks to satisfy the best of BOTH worlds in the short run.
- It needs to get back the market's confidence by continuing been prudent and proves its dividend sustainability (can it still provide 5.25cents/yr beyond 2014 where TBC starts repaying its debt again?), until the day it can resume its asset recycling strategy again..hehe

---

hi Qiaofeng,
i agree with all of ur observations/comments with the exception of below:
(1) The majority of price increase (causing narrowing of NAV discount) came from the general market recovery since March2009, esp fears that Mac group wasnt going bankrupt subsisided. Sharebuyback started in Mar2011, slide10 shown that since that time, it barely moved, instead price went down! (i suspect this is because ppl who previously bought in, hoping for some immediate cash back from its 37cents/share cash hoard were disappointed it wasnt going to give a special dividend). Therefore, share buyback did not cause share price and market cap to rise.

(2) Based on the prudent way that Mgt has handled its 37cents/share, i have the thumbs-up for its performance in the past 2 years. In fact, if it had continued its asset recycling, i would hv sold out (whether is it a loss or profit), since it doesnt meet my 'dividend play' criteria anymore.

I agree with the statements in bold.

For the statements underlined, my response is....

OK, so shr prices did not actually rose on that chart.
But, if U look at MIIF daily charts from Mar 2011 to today.
U will see the shr buyback pushed prices from 0.525 to 0.620, dropped to a low of 0.46 in the present crisis and rose back to 0.5/0.49 today.Would that have happened w/o the buybacks?

IMHO, the share buybacks definitely help prevent the shr price from falling further vs NAV, then w/o. Hence, preventing Mkt cap from faliing further as during GFC. Concerning the plot, maybe my choice of words were not accurate.
In the GFC, the max discount to NAV was 76%.
In the current Eurozone sovereign debt crisis (add US debt crisis), the max discount is at 42% (0.46 vs NAV 0.79).


Compared with buybacks, the cash is better reserved for deployment in acquiring more accretive infra plays which is what the MIIF biz model is about.

The effect of the buybacks maybe temporary in a prolonged Eurozone debt crisis where fundamentals don't matter in Mr Market's mind; so management should NOT spend time defending that shr price.
That they do so is negative and again I blame the fees incentives scheme as self serving (MIMAL) rather than pro-shareholders.

I think you made an error in the bolded statement - MIIF only started to repurchase shares on 18 March 2011 at 57.5 cents per share. There was a 2 weeks rally to 62.0 cents before people took advantage of the Fund's generosity and started to sell it down back to 58 cents. It could also be attributed to the release of TBC circular which shows the loan repayment plan in mid April. It kept dropping since then since 1) The Company value is declining as cash flows away permanently and 2) Potential debt crisis in the macro-world.

I don't see how the share buy back would benefit MIMAL in any way. It decreases cash, decreases the value of the Fund, decreases the market cap, decreases its potential in making a new investment etc. The only good thing they can derive from it is winning goodwill from the investor community since it is a risk free way of boosting DPU (as opposed to buying something with a lower yield). Share buy-back/special dividend is just another way of downsizing the fund permanently (till another equity fund raising is conducted). A downsized fund cannot possibly earn higher management fees. We have to face the possibility that this is what MIIF could possibly look like in the future - smaller portfolio, smaller equity, smaller cash pile and larger NAV, DPS etc.

[Qiaofeng]

Since 2009, they became more cautious and halted the asset trading policy. Instead, value in the form of book value growth and distributions were tied directly to the performance of the 3 core assets. For example, MIIF unitholders will only benefit if TBC value appreciated or its distribution increased and this rest upon TBC Management's ability to grow its business and market share in the long run. In other words, value isn't being created by MIMAL directly anymore since they don't run it directly (though they sit on the Board). How the Management of TBC, CXP and HNE fares operationally will determine the Fund's fate.

Previously, I would be more concerned with the Management ability to buy low sell high or finding opportunities in distressed markets or using debt to buy new investments or making opportunistic bets etc. But these days, I would be more concerned about how is TBC performing or how is the traffic volume in HNE etc since these assets are funding the dividends. Hence, I would say that MIIF value rest on the underlying assets and their future prospects as opposed to MIMAL's ability to under-take active portfolio management (like in the past).

MIMAL did not run the assets previously.
MIMAL is also not running the assets that they acquire in the various Asian countries in the new strategy, either.

If U think of MIIF as a pure divid play then MIMAL can stop at the 3 assets.
But, what about putting the cash hoard from the divestments to use ?
MIMAL must undertake active portfolio management and invest in other assets to recycle the cash; otherwise why the base fee of close to 4m qtrly ? which is an expense ( we are not talking performance fees).
MIMAL must be proactively looking for and researching better assets. otherwise they are sleeping at the wheel.
Also, HNE has an existing loan maturing soon. What are the plans for handling this?

Sorry on the 0.525 figure, should read 0.575 as U pointed out.
Remember MIIF as the name suggests is an Infra fund allocator; it manages the funds.
It cannot just use share buybacks to reduce the size of the funds (cash hoard), pay yearly divds and collect base fees

[freedom]

from September 09 til 28, the company did no share buyback. the share price of MIIF went down in a straight line. if I am not wrong, there were not one day the share price rose.

it clearly showed that the only support of its market price was the share buyback.

if we extend it further back to March 2011, it should not be difficult to get a price of below 40 cents now without share buyback.

with little cash spent, the share price was prevented from falling to below 40 cents against current 50 cents. How could we say the share buyback did not help the market cap?

of course, it is just my hypothesis. maybe without share buyback the market price would be better than 50cents. no one can travel back to March 2011, create a different path without share buyback and prove that share buyback did not help market cap.

[Nick]

Since 2009, they became more cautious and halted the asset trading policy. Instead, value in the form of book value growth and distributions were tied directly to the performance of the 3 core assets. For example, MIIF unitholders will only benefit if TBC value appreciated or its distribution increased and this rest upon TBC Management's ability to grow its business and market share in the long run. In other words, value isn't being created by MIMAL directly anymore since they don't run it directly (though they sit on the Board). How the Management of TBC, CXP and HNE fares operationally will determine the Fund's fate.

Previously, I would be more concerned with the Management ability to buy low sell high or finding opportunities in distressed markets or using debt to buy new investments or making opportunistic bets etc. But these days, I would be more concerned about how is TBC performing or how is the traffic volume in HNE etc since these assets are funding the dividends. Hence, I would say that MIIF value rest on the underlying assets and their future prospects as opposed to MIMAL's ability to under-take active portfolio management (like in the past).

MIMAL did not run the assets previously.
MIMAL is also not running the assets that they acquire in the various Asian countries in the new strategy, either.

If U think of MIIF as a pure divid play then MIMAL can stop at the 3 assets.
But, what about putting the cash hoard from the divestments to use ?
MIMAL must undertake active portfolio management and invest in other assets to recycle the cash; otherwise why the base fee of close to 4m yearly ? which is an expense ( we are not talking performance fees).
MIMAL must be proactively looking for and researching better assets. otherwise they are sleeping at the wheel.
Also, HNE has an existing loan maturing soon. What are the plans for handling this?

Sorry on the 0.525 figure, should read 0.575 as U pointed out.
Remember MIIF as the name suggests is an Infra fund allocator; it manages the funds.
It cannot just use share buybacks to reduce the size of the funds (cash hoard), pay yearly divds and collect base fees

HNE loan matures in 2020 and it amortizes annually with a balloon profile.

If MIIF have no great investment target, it makes better sense to downsize the fund. Investors would be happy since the DPS will increase in the process since outstanding float is reduced and management fees would drop.

Of course, it will keep looking for something good. The fees will drive them to do that since it will be fee accretive to buy something. But with that being said, the current dividend profile hinges on the operational and capital sustainability of the underlying assets as opposed to MIMAL ability to divest these assets at a profit and buy something else and then sell it again at a profit while hoping no credit crunch comes and destroy the valuation of whatever they are holding. Again, all of this are based on my inferences of the Management actions over the past few years rather than concrete facts so I might be mistaken.

It would be more interesting to examine how the 4 assets will perform in the coming years.

[Qiaofeng]

Nick,

Let's see where we differ.
1) Share buybacks-
Does ( My view) or Do not (Ur view) affect share price of MIIF and hence the incentive fees.
2) MIIF biz model/MIMAL role-
Ur view that MIIF was an Asset trader previously but is now an Asset owner focusing on managing the assets.
My view, despite the management changes from Kerr to Stuart, MIIF role should be that of a funds allocator and manager i.e. looking for good assets, chiefly earning regular cashflow from these assets but not averse to making opportunistic capital gains; in the process hedging risks from debts and reducing expenses. IMHO, John Stuart did badly in the role I defined for him and I blame the incentive scheme.
3) In addition, I am concerned about Off B/S debt ( esp HNE in China) and want more info on how they are funded together with local govts (SPVs etc). U seem happy with the info put out by MIIF on amortisation.

In sum total, I would say I have a more cynical view of management whereas U are more sympathethic, thinking that the management is trying its best to increase shareholder's value under the difficult circumstances.

For weijian and others vested or vesting, I hope U are right.
For me, I had divested , moved on and was trying to share My1c Gibberish.

Having made my views heard, I will stop my posts on MIIF in this forum, henceforth.

Thks guys for the robust debate.

From time to time, I may update my blog with comments, so plse drop by, if U find them of any use.