Last checked at 
28 Jan 2009 07:00
HSBC Infrastructure Company Limited
28 January 2009
HSBC Infrastructure Company Limited - 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 2008 to 27 January 2009. References to the Group below refer to the Company and its wholly-owned corporate subsidiaries.
The Group currently holds a portfolio of 28 infrastructure investments, of which 27 are PFI/PPP projects in the UK and Europe. All the projects are now fully operational and have long-term availability-based concessions with public sector clients. None of them require refinancing to meet their long-term business plans. The Group does not own equity stakes in demand-based infrastructure investments, where income can be affected by the level of usage (e.g. toll roads or airports).
All investments in the portfolio are delivering the contracted services. There are no operational matters upon which to report. As previously reported, the Colchester Garrison PFI Project received the final land sale proceeds in full in December 2008. No further capital contributions from third parties are outstanding on any projects.
On 18 November 2008, the Company declared an interim distribution of 3.125p per share for the six months to 30 September 2008 and this was paid to shareholders on 31 December 2008. A scrip dividend alternative was offered for the first time and there was a 3.1% take-up resulting in an additional 327,253 shares being issued in December 2008, bringing the total number of ordinary shares in issue at 31 December to 336,688,733.
Despite the economic climate, the Board still plans to grow the annual distribution progressively to 7.0p per share by March 2013. This is consistent with statements made at the time of the IPO in March 2006 and in the C Share Prospectus of April 2008. Since all projects are now operational, the annual distribution will be cash covered on an annual basis by cashflows from the underlying investments.
In recent months, there have been significant changes in the financial landscape, with a substantial fall in interest rates, lower inflation and the onset of recession in the UK economy. The Board has therefore decided to provide some guidance on how the changes in the financial and economic climate may affect the Company's Net Asset Value per share. Further details of the Investment Adviser's current assessment of valuation adjustments are set out below.
Valuation of the Portfolio
The Company values the portfolio twice a year as at 30 September and 31 March. At 30 September 2008, the Company's Net Asset Value per share on an investment basis ("NAV") was 118.3p (after payment of the 3.125p interim distribution).
The period since 30 September 2008 has seen substantial changes to economic and financial indices and forecasts. Whilst at an operational level the Group's PFI investments are trading satisfactorily, the valuation of these investments is being affected by the wider economic assumptions.
On 31 March 2009, as in previous periods, the Investment Adviser will prepare a fair market valuation for each of the Group's investments. This is 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 Board and the Investment Adviser have identified a number of factors which they expect to affect the valuation and, hence, the Company's NAV per share as at 31 March 2009.
Economic Assumptions
(a) Discount rates
At 30 September 2008, the Group's valuation used a weighted average discount rate for the PFI projects of 7.9%, based on the long-dated risk-free rate (derived from the average of the 20 and 30 year gilt rates) plus a risk premium. This has been a consistent approach since launch.
Whilst there has been little overall change in the long-term risk-free rate since 30 September 2008 (even though it has been volatile), there is some evidence, based on a small number of transactions and the pricing of new primary PFI projects, that discount rates for these assets are increasing marginally. If this trend continues, the weighted average discount rate at 31 March 2009 may need to increase slightly from 30 September 2008.
(b) Inflation indexation
The PFI projects in the portfolio have contractual income streams with public sector clients, which are rebased every year for inflation. UK projects tend to use either RPI (Retail Price Index) or RPIx (RPI excluding mortgage payments). Facilities management sub-contracts have similar indexation arrangements. In light of the significant reduction in inflation rates witnessed in recent months, it should be noted that any revision to long-term inflation forecasts will affect the Company's NAV per share.
(c) Deposit rates
Each PFI project in the portfolio has cash held in bank deposits, and this is a function of their financing structure. In September 2008, short-term annual deposit rates of 5% were available and this was taken as the long-term assumption used to value the portfolio. Currently, cash deposits are earning annual interest of around 2% per annum. Whilst interest rates may increase over time, the long-term assumption will be revisited for the 31 March 2009 valuation.
Market Fluctuations
(a) Kemble Water
The Group's junior debt investment in Kemble Water (the holding structure for the Thames Water utility business) is valued on a mark-to-market basis. As at 23 January 2009, the mark-to-market price had reduced by 25% from 30 September 2008, resulting in a decrease in the Company's NAV per share of 2.0p. The current intention is to hold this floating rate loan to maturity in 2014 when it is due to be repaid in full.
(b) The Group's interest rate swap
When the Group entered into its £200m five year revolving facility with Bank of Scotland in December 2007, the interest rate exposure over the five years was partially hedged by means of an interest rate swap. This hedge is marked-to-market for the purposes of the Group's accounts. Since 30 September 2008, interest rate swap movements have resulted in a reduction in the Company's NAV per share of 2.6p as at 23 January 2009.
Sensitivity Analysis
In the Company's last Interim Results presentation (available on the Company's website), the sensitivity of the 30 September 2008 valuation of the Group's investments to changes in the valuation discount rate, long term inflation and deposit rate assumptions were charted. The Company believes that this information will enable investors to assess the potential changes in valuation of the Group's investments, and hence the impact upon the Company's NAV per share, using a range of different assumptions.
Based on the current data and forecasts available, the Board and the Investment Adviser believe it is highly likely that certain valuation assumptions used in the last valuation will need to be revised in March 2009. Patently, the precise impact upon the Company's NAV per share will depend upon the view taken on such assumptions coupled with the mark-to-market prices of quoted investments and derivative contracts.
It is the Investment Adviser's current assessment that overall these changes to the economic assumptions listed above (discount rates, inflation and deposit rates) could result in a reduction in the NAV per share at 31 March 2009 of between 4p and 8p (on a post distribution basis when compared to the corresponding position at 30 September 2008). This is in addition to the mark-to-market adjustments on the Kemble Water junior debt and the Group's interest rate swap as at 31 March 2009, as described above. Gearing
The Group has a £200m five year revolving facility with Bank of Scotland, and at 31 December 2008 the Group's net debt position was £65.7m.
New Investments
In December 2008, the Group acquired a 30% interest in the Barnet PFI Hospital project, taking the Group's equity interest to 81%. The consideration was £2.7m. This acquisition is in line with the Company's objective of increasing its investment in existing projects where these can be acquired on attractive terms.
Outlook
Despite the global economic downturn and the volatility of the financial markets, the Board and the Investment Adviser remain confident that the Group will achieve the Company's target of progressive dividend growth. Whilst changes in key economic variables impact the valuation of the Group's investments for the period under review, the current operational performance of the projects is strong and in line with expectations. The outlook for the Group to acquire additional investments remains good. Graham Picken, Chairman of HSBC Infrastructure Company Ltd, said
'The Board is pleased with the Company's current good performance, notwithstanding the deterioration in the economic and financial climate. Inevitably a change in economic assumptions coupled with adverse market conditions creates some modest financial sensitivity in asset valuations.
Our investments continue to perform operationally as expected, and the Investment Adviser is actively managing the portfolio to ensure that returns are maximised. The Company remains well placed to make further acquisitions, as and when suitable opportunities arise.'
Enquiries
HSBC Specialist Fund Management Limited +44 (0) 20 7991 8888
Tony Roper
Keith Pickard
Sandra Lowe
M:Communications +44 (0)20 7153 1523
Ed Orlebar
Tilly von Twickel
Collins Stewart Europe Limited +44 (0) 20 7523 8000
Dominic Waters
Neil Brierley
David Yovichic
Oriel Securities Limited +44 (0) 20 7710 7600
Tom Durie
Emma Ormond
Notes
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 28 infrastructure projects, all operational, and is seeking further suitable investment opportunities which fit its Investment Policy.
In April 2008, the Company launched a successful C share issue and raised £103.6m. The C Share Prospectus is available from the Company's website.
Further details of the Company can be found from its web site 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. HSBC Specialist Fund Management Limited is authorised and regulated by the Financial Services Authority.