27 June 2007

RBC Bulks Up for Infrastructure Boom

The Globe and Mail, Tara Perkins & Lori McLeod, 27 June 2007

The Royal Bank of Canada is pouring resources into bulking up its global infrastructure business in the belief that the private sector is embarking on a buying binge of assets such as roads and prisons, especially in the United States.

RBC has been putting dozens of investment bankers into its M&A advising and financing team, whose ranks have swollen towards 80. It's now contemplating a push into directly investing in the booming sector.

The moves have vaulted the bank into an arena where it's going head to head with global heavyweights such as Goldman Sachs Group Inc., the Royal Bank of Scotland Group PLC and France's BNP Paribas SA to advise on and fund deals.

The team of bankers that RBC has built up to help other organizations buy and sell infrastructure assets is housed in offices stretching from Sydney to Madrid, with U.S. bases in Massachusetts, New York, Florida and California. The bank rakes in fees from dispensing advice to buyers and sellers, or raising financing for the deals.

The team's revenue has been growing by about 50 per cent each year for the past three years, the bank said, although it won't disclose numbers.

It believes it is one of the top five contenders in this arena around the world.

Since the start of November it has closed about 30 deals, and is working on 50 more.

As RBC continues to aggressively bulk up on expertise, it is also considering becoming an equity investor in infrastructure assets. "This is an area we are looking at," said spokesperson Katherine Gay.

That could mean going head to head with - or partnering up with - buyers in the market including Canada's biggest pension funds, which are recognized as top deal makers in the infrastructure arena.

Multibillion-dollar funds like Ontario Teachers Pension Plan, the Canada Pension Plan Investment Board, the Ontario Municipal Employees Retirement Board and the Caisse de dépôt et placement du Québec have snapped up assets including airports, water and power utilities, and toll roads.

In 2005, the City of Chicago kicked off what many expect to be a wave of government sales or leases of infrastructure assets in the U.S. by taking $1.8-billion (U.S.) for a 99-year operating lease on the Chicago Skyway. Some observers say that tens of billions of dollars worth of road deals are on the way in the U.S., as governments turn to the private sector to fund construction or refurbishment of essential services, and that could mean hundreds of millions of fees for bankers.

"The U.S. has been [in] a bit of a rush over the last 18 months," Adrian Bell, the head of RBC's infrastructure team, said in an interview from London.

The country has been underinvesting in its infrastructure for the last five to 10 years and "there is therefore a huge forward capital investment program needed to play catch-up on that," he said.

For instance, road systems haven't been expanded even though car travel is going up.

"In our view, we are going to see an increasing number of, first, roads and then municipal car parks, and we suspect airports as well," Mr. Bell said. "That's because there's a $1-trillion catch-up program over the next 10 years that has to be spent on infrastructure, and frankly the states have not got capital to spare to fund all of that."

Around the world, the total value of infrastructure deals this year has already hit $237.6-billion, compared with $294.2-billion for all of 2006, according to Thomson Financial.

And three of the ten largest proposed M&A deals by dollar value in the world this year involve infrastructure assets, according to Bloomberg, including the $67.5-billion acquisition of Spanish power utility Endesa SA to the $43.2-billion deal for U.S. power utility TXU Corp.

The competition has noticed that RBC's team is getting bigger. Roland Davis, the head of European infrastructure for CIBC World Markets Inc., said "I watch RBC with interest because it's absolutely right that they have grown very fast."

Most of the big Canadian banks are now also putting more resources into their infrastructure teams, though not to the same degree as RBC.

The Canadian banks were a bit slow off the mark when it comes to cashing in on the global infrastructure boom, some observers say. On the financing side, that may be because, on its face, it doesn't appear to be all that lucrative. "They've all been very slow to get it, and so have the American banks," Mr. Davis said.

"And the reason is that infrastructure finance, the debt structures, just don't fit with the way that the North American style of banking works. They're low-margin, low-risk, very long-term," he said. "And the credit community of North American institutions, including RBC, including CIBC, including I think any other bank there, they just have never liked that sort of thing."

But it's not an area they can afford to ignore, Mr. Davis suggested. "In my view, it's a completely new sector of the finance economy. And, in years to come, there will be bonds, there will be equities and there will be infrastructure, and people will wonder how it was that infrastructure didn't used to exist."
RBC's infrastructure strategy

The Game

Infrastructure encompasses public services such as ports, roads, airports, prisons, hospitals, schools and utilities. The definition is expanding rapidly to include areas like water and waste, and some eager investment bankers have been pitching deals for assets ranging from telecom companies to lotteries as "infrastructure" to capitalize on the term's hype.

The History

Britain delved into "private finance initiatives" (known in Canada as "public private partnerships") 15 years ago. Canada got into the game about a decade ago, beginning with airports. The U.S. only caught up with the trend with the $1.8-billion (U.S.) long-term lease of the Chicago Skyway, a deal that closed in 2005. That was followed up by a $3.8-billion 75-year lease of the Indiana Toll Road in 2006. Observers say Asia and South America could both be on the verge of massive infrastructure investments in the years ahead.

The Investors

Canada's pension funds have been pouring money into global infrastructure deals, and are recognized as major players in the space. Top deal makers include Teachers, CPP, OMERS and the Caisse. These multibillion-dollar pension funds have snapped up assets including airports, water and power utilities and toll roads. Another big player is Brookfield Asset Management Inc., whose more than $70-billion (U.S.) in assets under management include Chilean power lines and stations. Observers say that, increasingly, it's the European and Australian infrastructure funds and construction companies that are driving the process in North America. Australia's Macquarie Infrastructure Group is recognized as being a leader when it comes to road investments. "The problem with the U.S. for a lot of people is that Macquarie is very dominant in roads, and a lot of the U.S. work is going to be roads, and I think it scares people a bit," said CIBC's Roland Davis. "At the moment, I think a lot of people take the view that if Macquarie is bidding for a project, you just won't bid against them, because the only way you could beat them is if you're doing something stupid."