HICL Infrastructure (HICL), the UK's largest listed investor in public sector facilities, has joined with a consortium of investors to buy the High Speed 1 rail project (HS1) from Borealis Infrastructure.
HICL’s investment manager InfraRed has joined with Equitix Investment Management to acquire HS1, spreading the investment across numerous funds that both firms manage. HS1 operates the country's only high-speed rail link, including four stations and the associated infrastructure. The rail link runs for approximately 109 km between London St Pancras International station and the Channel Tunnel.
HICL, a popular £2.9 billion income fund, will acquire a 35% equity interest in HS1, for which the investment company will pay £320 million. Once the deal completes, HICL plans to bring in minority co-investors, which also work with InfraRed, to buy £120 million of its commitment.
Terms of the deal were not disclosed but the Financial Times reported HS1 was sold for an embedded value of more than £3 billion, less than the £3.6 billion that was first sought.
This is not the first time the Guernsey-based investment company has sold down an initial stake in an asset: it is currently in talks with co-investors to take on part of its recent £260 million stake in Affinity Water, which is its biggest investment to date.
The HS1 investment will be funded using HICL's existing cash resources and revolving credit facility. If the infrastructure investment company is able to bring in co-investors to take on £120 million of its initial stake, this will leave it with a net funding requirement of approximately £140 million.
Another share placing?
HICL, like other closed-ended infrastructure funds, tends to acquire stakes in infrastructure assets using its credit facility and then pays the cash back via a fundraising. A spokesperson for HICL said a future share placing to the fund the commitment could not be ruled out once the deal completes. Analysts at Stifel expect an equity issue could take place in September or October of this year.
HICL completed a £270 million 'tap' share issue back in June to repay the cost of its Affinity Water acquisition. The share issue was over-subscribed - as was its penultimate share issue back in March, which raised £260 million.
HS1's revenues are generated from domestic and international train journeys, alongside other activities, such as retail leases at St Pancras International, maintenance and operations.
‘The investment is in line with HICL's stated acquisition strategy and is expected to be accretive to the existing portfolio, in particular with regard to yield and inflation correlation,’ said Harry Seekings, a director at InfraRed Capital Partners.
Once the deal finalises and the stake is sold down to £200 million, it is expected to account for approximately 7% of HICL’s net asset value, and 16% of the investment company’s allocation to demand-based assets, where returns are correlated to wider economic activity.
The fund has a 20% limit towards demand-based assets, such as toll roads, which rely on people using the service. Availability-based assets represent the other type of investment that infrastructure funds hold, where they receive regular payments from a public sector client if the asset is available for use and meets certain standards.
The investment in HS1 is a concession with 23 years to run until 2040. Stifel analyst Ian Scouller noted that international train operators typically review their requirements every five years, while the UK domestic train operator franchise (South Eastern) is currently in the process of being refranchised.
‘The purchase of a substantial stake in the HS1 rail line follows surprisingly hot on the heels of the Affinity Water acquisition and continues to move the portfolio from its original PFI concession base,' said Scouller.
'It also introduces some other risks – notably economic demand risk together with maintenance (which will be sub-contracted) and political risks,’ he added.
Infrastructure loses its shine
As speculation has grown that the Bank of England could be close to raising interest rates from their historically low levels, this has caused traditional ‘bond proxies’ (like infrastructure) to fall out of favour. This term describes assets that display bond-like characteristics due to their defensive nature.
In an era of ultra-low interest rates and bond yields, these assets become attractive to investors, who were willing to pay a premium for them.
In July of last year, HICL’s premium to NAV reached a high of 30% but has continued to fall. Since April, its premium has fallen from close to 20% to 8.3% on 13 July. Its share price has dropped from 171.7p in April to 161.8 today.
'The share price had shown some signs of recovery from its recent low point of 160p, which was below the 165p issue price of the £258m equity issue in June. But clearly the prospect of another large equity issue at circa 160p or even below is likely to put the lid on the price for now,' Scouller added.
Over the past five years, HICL's share price has risen by 75.1%. This is very much in line with a rise of 75.2% by the average fund in the Association of Investment Companies' infrastructure sector.