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Marine Terminals in the Downturn - Infrastructure Finance Perspectives

Marine Terminals in the Downturn - Infrastructure Finance Perspectives. Mr. Richard J. Nicholson Managing Director ， Macquarie Capital Funds – Ports Asia March 1 & 2, 2010 Long Beach, California. ABOUT MACQUARIE…………. Macquarie Capital de e p asset management expertise….

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Marine Terminals in the Downturn - Infrastructure Finance Perspectives

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  1. Marine Terminals in the Downturn - Infrastructure Finance Perspectives Mr. Richard J. Nicholson Managing Director，Macquarie Capital Funds – Ports Asia March 1 & 2, 2010 Long Beach, California

  2. ABOUT MACQUARIE………….

  3. Macquarie Capitaldeep asset management expertise… More than 100 million people daily use essential services provided by Macquarie Capital Funds 1. Includes sub-metering services for oil and gas, and water As at 31 March 2009

  4. South Korea • Baekyang Tunnel • Cheonan-Nonsan Expressway • Incheon International Airport Expressway • Gwangju 2nd Beltway Section 1 • Gwangju 2nd Beltway Section 3-1 • Machang Bridge • Soojungsan Tunnel • Daegu 4th Beltway East • Incheon Grand Bridge • Seoul Chuncheon Expressway • Woomyunsan Tunnel • Yongin-Seoul Expressway • Seosuwon-Osan-Pyungtaek Expressway • West Sea Power/West Sea Water • C&M (cable tv) • Hanjin Pacific Corporation (ports) • Busan New Port Phase 2-3 • Seoul Subway Line 9, Section 1 UK • M6 Toll • Bristol Airport • Wales & West Utilities • Thames Water • Combined Landfill Projects Envirogas • Energy Power Resources • Arqiva • Airwave • Red Bee Media • Condor Group (ferry services) Canada • Edmonton Ring Road • Highway 407 ETR • A-25 • Sea to Sky • AltaLink • Cardinal (power station) • Whitecourt (biomass facility) • Chapais (biomass facility) • Erie Shores Wind Farm • Hydro Power Business • Halterm Limited (port) • Fraser Surrey Docks • Leisureworld • New World Gaming Finland • Fonecta (directories) Spain • Itevelesa (vehicle inspection) • Asset Energia Solar • Solpex Energia Solar USA • Dulles Greenway • Indiana Toll Road • Chicago Skyway • South Bay Expressway • AIR-serv (tyre inflation) • Icon Parking • Total Terminals International • Harley Marine Services • Petermann (school buses) • Smarte Carte • Penn Terminals • Sentient (private aviation) • Airport Parking Business • Airport Services (fixed base operations) • Waste Industries • American Consolidated Media • Bulk Liquid Storage Terminal Business • Express Energy • Global Tower Partners • Macquarie DDR Trust • Macquarie CountryWide Trust • Aquarion Company • Puget Energy • District Energy • Duquesne Light • The Gas Company Czech Republic • Mediatel (directories) Slovakia • Mediatel (directories) Sweden • EPR Sweden (wind farm) • Arlanda Express • Lokaldelen (directories) Netherlands • De Telefoonggids (directories) • Gouden Gids (directories) • Moto (motorway services) • National Car Parks • East London Bus Group • Steam Packet (ferry services) • Wightlink (ferry services) Austria • Herold (directories) Poland • DCT Gdansk (container terminal) • Macquarie CountryWide Trust • pkt.pl (directories) Japan • Macquarie Direct Property Fund • Hanjin Pacific Corporation (Tokyo, Osaka) Belgium • Brussels Airport • Denmark • Copenhagen Airports • De Gule Sider (directories) France • Autoroutes Paris-Rhin-Rhône • Trois Sources & Lomont Windfarms • Compteurs Farnier (water metering) • EPR France (wind farm) • RES (wind farm) • Pisto SAS (oil storage and distribution) Australia • Dampier to Bunbury Natural Gas Pipeline • Multinet Gas Holdings • United Energy Distribution • AlintaGas Networks • Sydney Airport2 • Hobart International Airport • Westlink M7 • Retirement Villages Group • Macquarie Southern Cross Media • Regis Group (aged care) • Macquarie CountryWide Trust • MREEF • Macquarie Direct Property Fund Germany • Warnow Tunnel • Macquarie CountryWide Trust • GWE (heat & power) • Techem (submetering) • TanQuid (tank storage business) South Africa • N3 Toll Concessions • Bakwena Platinum Corridor • Trans African Concessions • Neotel • Kelvin Power Station Nigeria • Lekki Concession Company China • Changshu Xinghua Port • MWREF • Hua Nan Expressway Taiwan • Taiwan Broadband Communications • Miaoli Windpower • Hanjin Pacific Corporation (Kaohsiung) United Arab Emirates • Al Ain Industrial City • Industrial City of Abu Dhabi • ICAD Effluent Treatment Plant Puerto Rico • Global Tower Partners New Zealand • Metlifecare • Private Lifecare • Retirement Care New Zealand • Macquarie CountryWide Trust Mexico • Grupo Aeroportuario del Sureste de Mexico S.A. de C.V2 Real Estate Airports Communications Utilities Roads Transport & Related Services Other As at 30 September 2009. Represents businesses and assets which Macquarie Capital Funds manages on behalf of investors with various direct percentage stakes held in each. Subsequent to the internalisation of MAp on 15 Oct 2009, Sydney Airport and Grupo Aeroportuario del Sureste de Mexico S.A. de C.V are no longer managed by Macquarie Capital Funds. Global leader in infrastructure funds…

  5. Macquarie Ports Group… • Macquarie established dedicated Ports Group in 2005 • Ports Group responsible for assessing and managing investments on global basis • Ports Group combines unique blend of industry/operating expertise and investment/finance skills • Over USD 1 billion committed to Port investments across 12 terminals in 7 countries

  6. MacCap Funds have invested in twelve terminals globally Gdansk Vancouver Seattle Busan Tokyo Osaka Halifax Changshu Oakland Long Beach Philadelphia Kaohsiung Macquarie Ports portfolio…

  7. The characteristics of infrastructure are well suited for long term investors Long-term investors Infrastructure Essential services Strategiccompetitiveadvantage Inelastic demand Predictable long-termcash flows Low risk Long term Predictablepayments Infrastructure has been an asset class for over 15 years…

  8. HIGH Unregulated airport Seaport with high elasticity Road with exposure to narrow economy Variability ofReturns Trunk road Regulated utility Essential airport LOW LOW HIGH Competition But, not all infrastructure is created equal… Cash flows from infrastructure vary across AND within sectors

  9. Proportion of Government spending on infrastructure Percent Source: National Accounts, OECD, August 2006. 2002 data not available in the USA Increasing demand for private infrastructure investment… Private investment in infrastructure is growing as alternatives to government funding become increasingly necessary • Governments have traditionally facilitated infrastructure investment • But most governments globally are reducing their expenditure to focus on more politically sensitive areas such as education, social welfare and defence • This trend is likely to continue

  10. Investorinterest • Investors seek long-term investments in assets with quality, stable cash flows • Appetite depends on credit metrics & investment returns • Higher returns required for equity investment into businesses without established operational history Transaction considerations • “Wait & see” approach to making investments until there is an appropriate transaction • Tighter valuations than previously transacted • Fundamental operational performance is key • Seeking to use less leverage Investment criteria • Funds making equity investments from $50m - $500m depending on individual investors & considerations listed above • Certain investors including infrastructure funds require active role in business management • Evaluation of key criteria including un-geared returns, level of contracted revenues & yield Trends in the equity markets… Healthy infrastructure investor appetite remains to deploy capital for the right opportunity

  11. Detailed cash flow models • Ideally 30-year forecast horizon (and low reliance on terminal values) • Discount rates based on market pricing and experience but with additional return expectations to account for uncertainties, e.g.: • Less mature assets • Less predictable regulatory regimes • Uncertain returns on capex • Lower near-term cash yields • Mandate to deliver inflation plus 4-6%. In fact • OECD funds targeting low/mid-teen IRRs, with single-digit yields • Emerging markets lower yields (to fund growth), but increased overall returns…high teens+ Long-lived assets with relatively stable capital structures and predictable cash flows Infrastructure valuation methodology… Discounted cash flow remains the most appropriate way to value infrastructure

  12. Different approach to capital management is required……. Equity is replacing debt for new deals • Strategy for existing investments • Sell assets • Retain earnings • Recapitalise De-lever Ungeared IRR still meets the mandate of inflation plus 4% to 6% THEN THE FUTURE? Equity 15% IRR 10%UngearedIRR TRADE OFF Lower Return for Lower Risk Debt

  13. 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2013 2012 1996 1997 2010 2011 Global container port demand growth… 20 15 10 5 Growth rate % p.a. 0 2009 2008 -5 -10 -15

  14. A Disconnect Emerging……..? Global container throughput YoY growth, 1Q05–1Q10E Source: Macquarie Global Container Database, February 2010

  15. Container volumes in Asia……… Asia container port throughput (TEU, YoY change %), 1Q05 to 4Q09 Source: Macquarie Global Container Database, February 2010

  16. 25% 23% 20% 15% 14% 13% 15% 10% 4% 5% 1% 0% -5% Throughput levels in North America and Europe -4% remain weak; in 4Q 09 volumes were 14% and -10% -8% 8% respectively less than the corresponding -15% volumes seen in 4Q 2006 -14% -20% China Australia Indian MENA Asia ex- South South Europe North Sub. China America Africa America Comparing change by region…… Change in throughput by region; 4Q 2009 vs. 4Q 2006 Source: Macquarie Global Container Database, February 2010

  17. North American volumes……… North America container port throughput (TEU, YoY change %), 1Q 2005 to 4Q 2009 Source: Macquarie Global Container Database, February 2010

  18. Population unemployed % 12 22 10 18 8 14 6 10 Median duration of unemployment 4 6 2 2 Weeks 1996 1986 2006 1988 1990 1992 1994 1998 2000 2002 2004 2008 2010 2010 1984 1978 2006 2008 1980 1982 1968 1970 1972 1976 1980 1982 1984 1974 1978 2002 2004 1972 1968 1970 1974 1976 1986 1990 1992 1998 2000 1988 1994 1996 US unemployment……..

  19. 350 8% 6% 340 4% 330 2% 0% 320 -2% US$ bn YoY 3MMA 310 -4% 300 -6% -8% 290 -10% 280 -12% 270 -14% Jul-07 Jul-08 Jul-06 Jul-09 Jan-08 Jan-09 Jan-10 Jan-07 Oct-07 Oct-08 Oct-06 Oct-09 Apr-08 Apr-09 Apr-06 Apr-07 US retail sales ex-food services (LHS) YoY change (RHS) Also reflected in US retail sales…….. Source: US Census, Datastream, Macquarie Research, November 2009

  20. 2001 Peak: 1.45 1.55 Jan 09: 1.46 1.50 1.45 Decd 09: 1.26 1.40 1.35 1.30 1.25 1.20 1998 1999 2000 2001 2002 2003 2004 2007 2008 2009 1997 1992 1993 1994 1995 1996 2005 2006 Total US business inventories-to-sales ratio Trend And the inventory to sales ratio………

  21. Container industry 2,500 capacity for 1.7-2.2m new homes pa 2,000 1,500 US housing starts (000's) 1,000 Current 500 591,000 Previous bottoms ~800,000 0 1976 1979 1982 1985 1988 1991 1994 2006 2009 1961 1964 1967 1970 1973 1997 2000 2003 And US housing starts…… Source: US Census, Datastream, Macquarie Research, November 2009

  22. Implications for the port industry… • Most capacity expansion projects on hold or on slow build programs • Many projects have been cancelled, delayed or scaled back in size • Carriers under pressure are giving up terminal shareholdings they’ve accumulated • Reorganization of some carriers also has implications for terminal customer base • Terminals not discounting, but no tariff increases being implemented • Transhipment tariffs under greater pressure than local tariffs • Port authorities are helping by offering lease discounts • Port businesses are being valued at 8-12x EBITDA • Listed port company shares are under-valued by the markets

  23. Infrastructure Long Term Investors Conclusion • Port Infrastructure is still an attractive asset class for patient capital • Current market is more difficult, but deals are still getting done • In the medium term, likely to see investors returning as the industry de-levers • Current opportunities in emerging markets, to capture the value from • Market growth • Need for expertise to drive operational and financial performance • Current stimulus packages

  24. Thank You !

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