Why receivership is not the end

If you are a toll road concessionaire and the name Korda Mentha starts being discussed by your lenders, you might conclude that your time is up.

Korda Mentha is an Australian firm specialising in, as it tactfully writes on its website, “assisting businesses facing challenging financial and performance issues”. In other words, Korda Mentha is the people your lenders will call if they feel your business (their investment) stands to lose money.

In Australia, Korda Mentha has acted as receiver for practically all of the country’s ill-fated toll road concessions, helping to broker sales for Sydney’s Cross City and Lane Cove tunnels as well as the Military Road e-ramps toll road. Its most recent engagement is the receivership of Brisbane’s Clem7 tunnel.

Lengthy analysis 

“Normally, we are involved in a project for some time, with the actual receivership – the taking possession of the asset – being preceded by a fairly lengthy analysis,” explains Martin Madden, a partner at Korda Mentha with over 30 years of experience as an insolvency practitioner. “On Lane Cove, for example, we acted as independent adviser [to the lenders] for some 12 months [prior to receivership],” he adds.

When it comes to toll roads, Korda Mentha gets called in when lenders start getting worried about traffic volumes not meeting original forecasts. Perhaps surprising, though, is just how early in the game creditors can start to get worried.

“The people I work with in this space that have a lot of experience with toll roads in the management sense tell me that in the first week of opening they can normally estimate whether a toll road is going to be successful or not,” offers Madden, echoing how the fate of Hollywood blockbusters tends to be decided following box-office receipts for opening weekend.

Once the firm is actually appointed as receiver, “the first thing we do is take control of the receipts and payments coming into the business and its ability to incur credit. The next thing we do is talk to staff and reassure them that just because the road is in receivership, it doesn’t mean it will close. We also talk to the counterparty on these assets – typically government – to explain how the receivership is going to work,” he adds.

The exit strategies for these assets – normally a sale – can take another six to eight months to broker. But even though lenders are sometimes on the hook for considerable sums of money, it doesn’t necessarily mean they stand to lose all of it.

“The first toll road we sold was Sydney’s Cross City tunnel in 2007, pre-financial crisis, and we sold that for A$695 million (€493 million; $702 million). That involved no loss to the lenders – they were paid in full – and there was a significant dividend to equity,” recalls Madden, although he stresses the bidding environment was quite different prior to the crisis.

“In Lane Cove there was a bond issue, which was credit-wrapped by MBIA [a monoline insurer], and the road was sold for some A$650 million, though it did cost twice that to build and the face value of the bond would have been between A$1.5 billion and A$2 billion. So on the face of it, there is this big loss to MBIA, which is the party that has to pay the bond holders,” says Madden.

“But interestingly in that case, MBIA had a twin strategy: on the one hand, it aimed to minimise its losses by maximising the sale price of the asset; but on the other hand, it went to the market and started buying bonds it had credit-wrapped at a discount, so MBIA were able to leverage down their loss significantly”.

Painting a picture of the winners and losers in the ongoing receivership of Clem7 is even trickier, as hedge funds became part of the process – “a fairly recent phenomenon here in Australia,” Madden says.

“For Clem7, it’s too early to say, but there is significant debt trading going on there at around 50 cents on the dollar. So some people will buy in at 50 cents and they may make a return or they may not.  Certainly the hedge funds are buying in on the expectation of earning returns of between 20 percent and 25 percent – no question on that,” stresses Madden. He acknowledges that at least half of the original 24 bank lenders on Clem7 have already sold their debt to hedge funds.

As a veteran of so many distressed toll roads, what does Madden think went wrong with these assets?

“There is considerable pressure on traffic consultants not to be conservative to help win bids. Traffic forecasters also don’t take any risk, which, combined with pressure from their clients to win bids, leads to overestimation. And I have to say that, even with the best intentions and reasonable mathematics, you still come out at the other end of traffic forecasts saying: ‘Gee, there are so many possibilities!’”, Madden says.

He concludes: “The value [of toll roads] is based principally on traffic forecasts because their other costs are very predictable. So if you get that wrong, these assets’ valuations become significantly inflated.”