Friday, November 5, 2010

Teachers, OMERS Snag U.K. High-Speed Rail

Richard Blakwell of the Globe & Mail reports, Teachers, OMERS snag U.K. high-speed rail:
As Canada engages in a heated debated about the sale of a prized asset to a foreign company, a pair of large Canadian investors has picked up a key piece of Britain’s domestic infrastructure – its only high-speed rail line.

Ontario Teachers’ Pension Plan and Borealis Infrastructure – an arm of Ontario Municipal Employees Retirement System – signed a joint deal to buy High Speed One, the rail link from London to the mouth of the Channel Tunnel.

The pension funds paid £2.1-billion, or about $3.4-billion, to a state-owned rail company for the rights to run the line. They won’t actually own the property on which the 110-kilometre rail line runs, nor the four stations on it, including the historic St. Pancras in London; those will stay in government hands.

But the funds will operate and maintain the HS1, and collect track-access charges from all the rail companies that run trains on it, for 30 years.

Currently, Eurostar trains take the route before entering the Channel Tunnel and continuing on to European capitals, and some domestic high-speed services also use it. The very busy line carries nine million international passengers and five million domestic passengers a year. New routes to Germany and the Netherlands are expected to start in coming years.

The key for the Canadian pension funds, said Teachers senior vice-president Stephen Dowd, is that the rail line will generate “stable inflation-protected returns,” along with growth from new services as European regulators encourage more rail travel.

Neither OMERS nor Teachers would reveal specific terms of the agreement before the deal closes in a few weeks.

David Kaposi, global head of alternatives for pension consultant Mercer, said this kind of infrastructure investment is ideal for large pension funds, because it generates predictable returns over the long term to balance against the funds’ pension liabilities.

“What is attractive to many pension plans is a long-term stream of cash flows,” he said. “As long as they can earn a return on it that makes sense for their liabilities, it is actually a classic investment for a pension plan.”

OMERS and Teachers have investments in a number of other British infrastructure assets, including ports, airports, and gas distribution networks.

For the British government, the sale of HS1 will generate money to help pay down the country’s deep debt. Transport Secretary Philip Hammond said the price was more than the government expected to glean from the sale, and it represented a “vote of confidence” both in the country and the future of high-speed rail.

The Canadian pension funds outbid a number of other groups, including a consortium of Goldman Sachs and Eurotunnel (the company that runs the Channel Tunnel); another group led by Morgan Stanley; and one set up by German insurance company Allianz.

The nationality of the buyer was not an issue, a Transport department spokesman said. “We chose the bidder that in our opinion provided the best overall deal for U.K. taxpayers.”

Not everyone is thrilled about the sale. Britain’s huge Rail Maritime and Transport (RMT) union called it an “act of political vandalism on the U.K. railways.”

The line has been “sold off for a song in what amounts to nothing more than a fire sale of the family silver to prop up the financial deficit caused by the bankers and speculators in the first place,” RMT general secretary Bob Crow said in statement on Friday.

RMT spokesman Geoff Martin said the key issue is not that foreigners were the winners in the bidding for HS1. The union is concerned more broadly about the privatization of state assets, he said.

Sold off for a song? I doubt it, but let's wait to see the details of the deal. Infrastructure deals have been priced up lately as more investors look to get into this asset class. Teachers and OMERS have lots of experience with infrastructure, and without knowing any details, this sounds like an excellent long-term investment.

But there are risks in this asset class, and investors should beware before jumping into it. Importantly, infrastructure is no panacea, and as deals get priced up, and investors take on more equity risk and leverage, then they increase the risk of suffering losses on these investments (not to mention there are other risks in infrastructure deals that people should be aware of).

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