Macquarie International Infrastructure Fund

[weijian]

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.

For (1),
i think most of us knows it DOES affect share price (in terms of putting in extra demand). But it does not increase market cap n increases fees as a result. This is the pt that Nick is trying to put out. Just do some simple maths (as i did) n it becomes very clear.

For (2),
'Opportunistic' is a very dangerous word. Opportunists shdnt deserve the 4mil qtrly income.

For (3),
Very valid concern on the B/S of ALL its assets. As nick noted again, more transparency is required.

QF,
Thanks for your alternative views. I learnt some new insights. As the value investing in China presentation by Mr. Cheah Cheng Hye mentioned, whenever we enter a transaction, we shd always look at the opposite partner's reasons..

[VestedInterest]

Thought I'd share my 2 cents worth on this one. Have been in and out of this counter 2- 3 times in the past since its listing few years back. Each time have lost money. Each time entered because enticed by its dividend yield- in the region of 10% or more. Each time I get in and after the dividend is distributed, the unit price falls by a quantum more than the dividend paid out. Have not looked at it for the past 2-3 years already. Guess what, again the dividend yield has caught my eye. I realise now that it is a slightly different animal from before with the disposal of its other assets.
I suspect that with the share buy back, the price should correct upwards to maintain capitalisation but this is not happening. Instead if one were to look at the daily queues, there is a whole lot of sellers wanting to sell at 0.495. There is something not right here. Their job is to look for good assets to buy, especially in the recently depressed markets, not to take the easy way out distributing cash from the kitty. As managers they are paid to do a job- and we're not talking about peanuts here.
I think until we see greater clarity, I struggle to steer clear of this counter. But again, the allure and temptation is in the dividend yield, the NTA and the share buy-back. Perhaps if I run out of ideas myself and see the queue on the sell side shortening, I might go into this one again but yet again 'once bitten twice shy'.

[karlmarx]

...

The underlying assets are geared. The debt in MIIF B/S refers to its 100% stake in Miaoli Wind (fully written off) and non-recourse to the Fund. Net cash is approx $120 mil and is being used to repurchase shares and fund any potential investments in the future. In descending order of size in MIIF portfolio, TBC gearing is 47%. HNE gearing is 60%, CXP is 19% and MW is 100% (equity 0). The overall Debt/EBITDA is around 5. Debt is repaid regularly at asset level and non recourse. Of course, this brings new set of challenges which is another story altogether ! It is isn't as highly geared as Cityspring. I guess similar level with most Trust with the exception of regular loan repayment.

(Not Vested)

i've never encountered such capital structure before so perhaps you can enlighten me.

how can MIIF hold significant stakes in these infrastructures and not have their debts on its balance sheets? or why are the infrastructures included in MIIF's balance sheet as asset, but not its debt?

by non-recourse does it mean that MIIF does not have to be responsible in the event of a default? how is it that MIIF is reaping the rewards but not taking the risks?

[Nick]

...

The underlying assets are geared. The debt in MIIF B/S refers to its 100% stake in Miaoli Wind (fully written off) and non-recourse to the Fund. Net cash is approx $120 mil and is being used to repurchase shares and fund any potential investments in the future. In descending order of size in MIIF portfolio, TBC gearing is 47%. HNE gearing is 60%, CXP is 19% and MW is 100% (equity 0). The overall Debt/EBITDA is around 5. Debt is repaid regularly at asset level and non recourse. Of course, this brings new set of challenges which is another story altogether ! It is isn't as highly geared as Cityspring. I guess similar level with most Trust with the exception of regular loan repayment.

(Not Vested)

i've never encountered such capital structure before so perhaps you can enlighten me.

how can MIIF hold significant stakes in these infrastructures and not have their debts on its balance sheets? or why are the infrastructures included in MIIF's balance sheet as asset, but not its debt?

by non-recourse does it mean that MIIF does not have to be responsible in the event of a default? how is it that MIIF is reaping the rewards but not taking the risks?

MIIF is an investment fund so its source of income comes from the dividends distributed from these assets (as opposed to the underlying profits generated from it). These assets can be profitable but if they don't distribute anything to MIIF, it will record 0 revenue from that asset. A simple example would be us - we can buy 5% stake in Keppel Corp and become a substantial shareholder. Yet, we do not need to write Keppel Corp debt into our net worth nor are we entitled to Keppel Corp profit unless it declares a dividend. Things are more complicated for MIIF since it now holds substantial stake in its 3 income generating assets - 38% stake in CXP Port in PRC (rest owned by Pan United), 81% stake in a toll road in China and 47.5% stake in a cable tv coy in Taiwan. It doesn't consolidate the accounts of these investments into its B/S...only the market valuation of the investment are accounted for. I believe CM Pacific adopt this method of accounting for its toll road assets in China as well. MIIF isn't liable to the debts but if they cannot repay/refinance their debt, then MIIF suffers since the underlying asset have to slash (or halt) dividend. This happened in late 2008 when Arqiva (a UK monopoly) halted dividend payment due to the credit crunch and MIIF had to sell at a loss. Cityspring underlying debts are also non-recourse but we saw how the threat of a downgrade of Basslink bonds forced it to hunt for equity a few months ago. Unless, MIIF (or Cityspring) is willing to impair the asset 100%, it bears the risk of debt indirectly. So far, the underlying assets are managed separately - the asset management run the assets, repay the debt annually, plan on capex and then declare excess cash as dividend to MIIF. The only asset that seems to be consolidated in the B/S is the 100% owned and 100% impaired Miaoli Wind. The debts in the B/S are MW's debt. The Management should provide more financial information of the underlying assets if they hold > 30% stake IMO. At the moment, we only know the revenue, EBITDA, total debt, debt repayment schedule, operational statistics and the annual distribution declared to MIIF.

Perhaps, investors with accounting background can share why MIIF is allowed to this !

(Not Vested)

[Drizzt]

look no further. keppel land and keppel corp owns 75% of kreit. kreit have 40% gearing.

[d.o.g.]

The Management should provide more financial information of the underlying assets if they hold > 30% stake IMO. At the moment, we only know the revenue, EBITDA, total debt, debt repayment schedule, operational statistics and the annual distribution declared to MIIF.

Perhaps, investors with accounting background can share why MIIF is allowed to this !

Accounting rules require consolidation if the company exercises control over the assets. This is usually interpreted to mean 50% plus 1 share, unless there are special arrangements e.g. golden/supervoting shares.

HNE should be consolidated since MIIF owns 81%. But it is not. This appears to be something the auditors (PricewaterhouseCoopers) have failed to enforce. Unless... the minority owners of HNE have control due to MIIF having non-voting shares etc. Perhaps this should be raised at the next AGM.

[donmihaihai]

There are ways not to consolidate subsidiary, associate or JV.

I don't know the reasons for MIIF but

1) all investment in MIIF recognised as "Financial assets at fair value through profit and loss".

2) Next accounting rule allow non consolidation if the management is seeking to sell the "subsidiary, associate & JV" in next 12 months or actively seeking to sell them.

3) Finally what is the business of MIIF?

I see no reason that MIIF is against any accounting standards.

Accounting standard is just accounting standard, how the company decided to use it tell alot about the management.

[weijian]

I sent the questions that some of us in the forum had, on MIIF to the IR dept. Below is the result (answers by MIIF in italics, elsewise are my words)......

...........................................

According to 1H2011 financial statement, Miaoli Wind is 100% owned by us and their debt is consolidated under MIIF's balance sheet, even though the borrowings are non-recourse to us. Our other big investment is Hua Nan Expressway (HNE), which makes up 26% of our portfolio and we have an 81% interest.

With regards to above, my questions are:
(1) Accounting rules requires us to consolidate any control entities if we exercise over 50% control. Are we violating any rules by NOT consolidating MIIF's majority owned HNE (debt for example) into MIIF's balance sheet?

[MIIF: MIIF prepares its accounts in accordance with International Financial Reporting Standards (IFRS). These accounts have been audited by PwC and have been assessed to be fully compliant with all appropriate accounting standards.

The same accounting standards also sets out rules which MIIF uses to determine whether an asset has to be consolidated or not. These rules requires MIIF to look beyond its shareholding in each asset. Therefore, it is not always necessary to consolidate entities which MIIF have >50% shareholding.

In the case of HNE, it is not consolidated in MIIF’s Group Consolidated Balance Sheet on a line by line basis because HNE is designated as an investment as held for trading under International Accounting Standards (IAS) 39. Under IAS 39, HNE is recognised as a financial asset and measured at fair value with fair value changes recognised in the statement of comprehensive income (P&L). This same approach has been applied to TBC and CXP.]


(2) We own majority stakes in Miaoli Wind and HNE. May i understand the reason in difference in accounting treatment between the both? Ie. Miaoli Wind's debt is consolidated into MIIF's balance sheet, but as for HNE, only management's valuation is shown in the non curent assets.

[MIIF: As MIIF wholly owns Miaoli Wind, therefore in accordance with International Accounting Standards (IAS) 27 Miaoli Wind has to be consolidated in MIIF’s Group Consolidated Balance Sheet on a line by line basis.]

[karlmarx]

thanks for the effort, wj.

so is it fair for MIIF to recognise those infrastructures as financial assets held for trading?

how would HNE, TBC, and CXP qualify for this classification?

[Drizzt]

they should all be held for trading.