HICL Infrastructure Regulatory News (HICL)

HSBC Infrastructure Company Limited

14 February 2011

Interim Management Statement

HSBC Infrastructure Company Limited ('HICL' or the 'Company'), the listed infrastructure investment company, is issuing this Interim Management Statement in accordance with FSA Disclosure and Transparency Rule 4.3. This statement relates to the period from 1 October 2010 to 11 February 2011. References to the Group below refer to the Company and its wholly-owned corporate subsidiaries.

Highlights

·; Six PFI/P3 acquisitions for a total consideration of £93.2m made during the period in the UK and Canada

·; Successful C share issue in December 2010 raising £110m

·; Investment portfolio performance in line with projections and cash flow expectations

·; Steady flow of further investment opportunities in the preferred asset types and geographies

·; Net Asset Value per share of 111.1p as at 7 January 2011 (being the C share conversion calculation date)

·; Interim dividend of 3.275p declared in November and paid at end of December 2010

Graham Picken, Chairman of HSBC Infrastructure Company Limited, said:

"The Directors remain very satisfied with the Company's performance and welcome the acquisitions made in the period.

Individual investments have performed as expected with no material issues.

The successful C share issue in December 2010 was oversubscribed despite competing claims for investor funding in the sector. This reflects not only continuing support from existing shareholders but also significant interest from new investors.

It was announced last June that the management of HSBC Specialist Investments Limited, the global infrastructure and real estate arm of HSBC and owner of the Company's Investment Adviser, HSBC Specialist Fund Management Limited, had agreed outline terms with HSBC to acquire a majority ownership and control of HSBC's infrastructure and real estate fund management businesses. Since then, the contractual agreements for this transaction have been signed as planned and it is expected that the transaction will complete around the end of March 2011.

The Board has engaged with the Investment Adviser and gained comfort that the change in control will have no impact on management's ability to deliver the required services to the standard required. In addition, we have reviewed the Investment Adviser's contract and negotiated a number of changes to it, all of which we believe are beneficial to the Company.

At the Company's extraordinary general meeting held on 10 November 2010, shareholders passed a resolution approving the new company name of HICL Infrastructure Company Limited. This change of name is scheduled to take place in March 2011 alongside the change in ownership of the Investment Adviser."

Werner von Guionneau, Chief Executive of the Investment Adviser, said:

"During HSBC's ownership, our business has been run as a separate legal and operationally stand alone entity with limited outsourcing of supporting functions. The day-to-day oversight and governance of the Investment Adviser will remain unchanged when the acquisition of a majority shareholding by the management team completes around the end of March. The continuing affiliation with HSBC will be underpinned by it retaining a 19.9% shareholding. Business has continued as usual since announcing the forthcoming change in June 2010.

We have worked closely with the Board and have accommodated requests to a make a number of changes to the Investment Adviser's contract in view of our change of ownership.

Unrelated, but as a reflection of the Company's success and growth of its asset base, we have agreed to share scale benefits with investors. For investments under management with an incremental value in excess of £750m, the Investment Adviser's annual management fee is reduced to 1.0% per annum (from 1.1% per annum) with effect from 1 January 2011, provided that the assets have become operational.

Strategically and operationally we are very pleased with the progress during the reporting period. The recent acquisitions, including the two Canadian projects, underscore our ability to grow the portfolio with high quality, yield enhancing assets and to deliver a measure of diversification in line with the Company's stated objectives.

We continue to manage the Group's portfolio actively and diligently while at the same time evaluating a steady flow of new investment opportunities. The successful C share issue in December, and access to debt funding through the Group's £200m banking facility, will enable the Company to capture value from the opportunities being presented to us. We expect to announce further acquisitions in due course."

Portfolio

Following completion of acquisitions in November and December 2010, the Group now holds a portfolio of 38 infrastructure investments, of which 37 are PFI/PPP/P3 projects in the UK, Europe, and Canada.

All the PFI/PPP/P3 projects have long-term availability-based concessions with public sector clients, none of which require refinancing to meet their long-term business plans. Three of the projects are in construction, comprising Bradford Schools Phase II, North West Anthony Henday P3 Road project and the M80 DBFO Road project. Construction on Bradford Schools is forecast to complete in the second quarter of 2011, behind the target programme due to construction delays which are the contractor's responsibility and risk.

The remaining 34 PFI/PPP/P3 projects are operational and delivering their contracted services satisfactorily.

Cashflow from the portfolio continues in line with projections.

Pipeline of new opportunities

As anticipated, the number of opportunities in the pipeline has started to grow as vendors plan for disposals during calendar year 2011. The Investment Adviser is currently working on a number of potential PFI/PPP acquisitions, mainly UK, operational projects.

Capital Raising

In November 2010, the Company announced a C share capital raising. This was successful, with applications totalling slightly in excess of the target size of £110m. We welcomed some new investors and institutions to our register. The C share issue was sized to fulfil outstanding investment commitments and pay down the Group's debt, thus freeing up the revolving bank facility for further acquisitions, as and when suitable opportunities arise.

As at 31 January 2011, the total number of ordinary shares in issue was 595.1m. This includes the ordinary shares arising from the conversion of the C shares in January 2011. The number of shares available for issue pursuant to the Company's existing block listing is currently 11.8m.

Dividends

On 11 November 2010, the Company declared an interim dividend of 3.275p per share for the year to 31 March 2011. This was paid to shareholders on 31 December 2010. A scrip dividend alternative was offered and there was a 10.4% take-up, resulting in an additional 1,467,477 ordinary shares being issued on 31 December 2010. The Board has set a full year dividend target of 6.7p per share for the year to 31 March 2011.

Acquisitions and additional Investments

Since 30 September 2010, the Group has made four new investments and two incremental acquisitions. 

In October 2010, a conditional contract was signed with a subsidiary of Bilfinger Berger SE to acquire four investments for an aggregate consideration of £65.9m, including deferred investment obligations of £46.1m:

·; a 50% interest in the Kent Schools PFI project;

·; a 41.6% indirect interest in the M80 motorway DBFO project currently under construction in Scotland. Through the future exercise of option rights over minority interests, this interest will increase to 49.9%;

·; a 50% interest in the North-West Anthony Henday ring road P3 project currently in construction in Alberta, Canada; and

·; a 50% interest in the Kicking Horse Canyon Transit P3 project in British Columbia, Canada, part of the Trans-Canada Highway.

The necessary approvals and consents were obtained and these four investments have now been acquired.

In October 2010, the Group acquired additional stakes in the Oxford John Radcliffe Hospital, where an 89.9% interest is now held, and Queen Alexandra Hospital, Portsmouth, now 89.9% owned, for a total consideration of £27.3m.

Valuation of the Portfolio

The Company values the portfolio twice a year as at 30 September and 31 March. At 30 September 2010, the Company's Net Asset Value per share on an investment basis ('NAV') was 109.2p per share (after payment of the 3.275p interim dividend). As part of the C share conversion process, the NAV per ordinary share of the Company was calculated as at 7 January 2011 and stood at 111.1p per ordinary share. This reflected the profitability of the Group including mark to market movements for the period from 30 September 2010 to 7 January 2011.

As in previous periods, the Investment Adviser will prepare a fair market valuation for each of the Group's investments as at 31 March 2011. This will be based on discounted cashflow analysis of future forecast cashflows of the Group. Whilst it is not yet possible to determine the key assumptions to be used in this valuation, the Investment Adviser has reviewed the assumptions used in the last valuation (30 September 2010) to assess whether there are any trends likely to affect the valuation and, hence, the Company's NAV per share as at 31 March 2011.

The following trends in key assumptions have been noted since 30 September 2010:

·; The UK risk free rates as referenced by long term gilt rates (average of 20 and 30 year) have been reasonably volatile and as at 31 January 2011 were approximately 0.6% above their level at 30 September 2010 and are now at a comparable level to that in March 2010;

·; As noted previously, movements in long term gilt rates do not mechanically move discount rates as the secondary PFI market seeks to look through short term volatility in gilt rates. Since September 2010, in the Investment Adviser's opinion, there has not been a significant shift in the overall discount rates used to value PFI assets bought and sold in the market;

·; Inflation expectations have also been raised since 30 September 2010, with UK RPI currently 4.8% and RPIx 4.7%;

·; Bank deposit interest rates (relevant for cash held by projects on deposit) currently remain low.

It is the Investment Adviser's opinion that the combination of the above factors has not had a material effect on the valuation of the Group's portfolio since 30 September 2010. As in previous periods, these key economic assumptions will be reviewed in the light of information as at 31 March 2011, in particular with regard to transaction activity in the secondary PFI market which is currently seeing a rise in bid opportunities but more competition.

As part of the Interim Results for the six months ended 30 September 2010, detailed guidance was given in the Company's Interim Report and Interim Presentation on the sensitivity of the valuation to the key economic assumptions (long term inflation rates and cash deposit rates) and changes to the weighted average discount rate used. Both the Report and the Presentation are available from the Company's website (www.hicl.hsbc.com - Investor Relations - Publications).

Gearing

The Group has a £200m five year revolving facility with Bank of Scotland. After the conversion of the C shares in January 2011, the facility is being used only for letters of credit in relation to the three PPP investments under construction. The Group has a net cash position on an investment basis, of which £54.4m represents outstanding investment commitments. The Group has capacity to make up to £200m of further acquisitions.

Outlook

Whilst uncertainties remain in the global economy and financial markets, the Board and the Investment Adviser are reassured by both the quality and performance of the Group's investments.

In the UK, where the majority of the Group's portfolio is domiciled, the coalition government has announced a Comprehensive Spending Review. This has affected new capital expenditure, with fewer new PFI/PPP projects being procured, but so far this has not impacted secondary market activity.

The Company is mindful of the need for efficiency at project level. The Investment Adviser continues to work closely with public sector and project stakeholders to make savings wherever possible, but will always seek to deliver services of the quality required by our clients.

Ends

Enquiries

HSBC Infrastructure Company Limited

The Company is a long term investor in infrastructure projects which are predominantly in their operating phase and yielding steady returns. It was the first infrastructure investment company to be listed on the London Stock Exchange. It currently owns a portfolio of 38 infrastructure investments, 37 of which are PFI/PPP projects, and is seeking further suitable investment opportunities which fit its stated Investment Strategy.

In November 2010, the Company undertook a successful C share issue which raised £110m. The C Share Prospectus is available from the Company's website.

Further details of the Company can be found on its website www.hicl.hsbc.com.

Investment Adviser

The Investment Adviser to the Company is HSBC Specialist Fund Management Limited, whose infrastructure investment team has successfully invested in infrastructure projects since 1997 and which is part of HSBC Specialist Investments, the infrastructure and real estate investment arm of the HSBC Group. It was announced in December 2010 that a contract had been signed with HSBC for the business to become an affiliate of HSBC (from its current status of 100%-owned subsidiary).

HSBC Specialist Fund Management Limited is authorised and regulated by the Financial Services Authority.