Utilities Industry Insights: The landscape for asset privatisations

Utilities Industry Insights: The landscape for asset privatisations

We examine financial market opportunities and challenges with the planned privatisation of utilities sector assets in NSW and QLD.

Mergers and acquisitions (M&A) activity is set to surge with the planned privatisation of utilities sector assets.

Overview

The M&A pipeline is set to reach potentially unprecedented levels in the utilities sector with the planned privatisation of utilities assets in Queensland and New South Wales. As a result, governments, financiers and investors are positioning to capture opportunities arising from the sale process. The assets in question include power generation and electricity networks that have reached a late stage of maturity, and the proceeds from their sale will allow governments to free up capital for other commitments such as transport infrastructure initiatives.

While the progress of these privatisations hinges on the re-election of the incumbent governments in Queensland and New South Wales in 2015, advisors have already been appointed so that the process can commence should these election outcomes materialise.

The status quo

Both Queensland and New South Wales governments are seeking sufficient liquidity to ensure that transactions can be successfully completed and both governments have the same requirements in terms of pricing and certainty of completion. The important consideration for governments is the sequencing of individual asset sales to ensure that liquidity remains available throughout the process, and to provide participating institutions and financiers with the flexibility required to manage and execute multiple large transactions.

To undertake such a large and complex task, there is a substantial debt financing requirement that will involve both local and international financial institutions and investors

The structure and process

To service this proposed M&A activity, there is a debt requirement of more than $40B.

The magnitude of this requirement is such that local financial institutions are under pressure to take up exposure beyond typical comfort levels and will be charged with structuring transactions to ensure debt facilities are palatable for the secondary market. Once the initial acquisition debt financing phase is completed, of the debt syndication process will occur involving another financial institutions and wider debt capital markets.  It is expected the financing process will comprise a multi-tiered funding structure, including:

  • 3 - 5 year syndicated debt
  • Up to 2 year bridge facilities
  • 7 year plus bond market issuance

How will stakeholders manage risk?

The primary risk involved is the level of exposure that initial financiers will have at transaction close. To manage the distribution risk and ensure that the debt can be placed in the hands of banks and institutions, having an investment grade financing structure will ensure that this process can be completed and the associated risks are minimised.

Where will the capital come from?

It is expected that local banks and selected global banks will initially participate in the financing activities, and act as a conduit to distribute debt widely to international institutions.

Pricing tension for long tenor finance is expected to come from international markets, and we anticipate US investors will have an especially strong appetite through the US Private Placement market.

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