New Issue: Macquarie Infrastructure (MIC) $305 Million Convertible Senior Notes

- by Bill Feingold and Jeffrey Alton, CFA

The Convertible

The repricing and upsizing of the MIC convertible (at 2.875% up 25%, the rich end of the original coupon range and 2.5 pecentage points through the rich end of the premium range) speaks to the ongoing demand for quality paper with decent coupons. This is virtually regardless of delta or underlying dividend. Investors seeking aggressive exposure to the Macquarie story and higher current income are probably best served focusing on the equity offering. But dedicated convertible investors can use the bond to help achieve their portfolio’s yield bogey with a dash of upside.  Despite the common dividend and frail volatility, the optics of a near-3% coupon and a mid-20’s premium are still compelling in an outright-driven market. A deal coming concurrently with a big slug of common equity also gives initial buyers more confidence that they won’t be stepping into a freefall—this has surely helped the demand as well. 

The Company

Macquarie Infrastructure Company LLC (NYS: MIC) owns and operates infrastructure primarily related to the energy industry under long-term contracts. The company’s business model is to manage the margin related to these operating segments and pay out 80 to 85% of free cash flow to shareholders.  Free Cash flow in 2013 was $4.09/share, and based on the acquisition of the remaining 50% of International Matix Tank Terminals (IMTT) that MIC does not own, the company is guiding 2014 cash flow/share to $4.55 (excluding acquisition expenses) and $5.10 in 2015.  If MIC achieves its 2015 cash flow goal, the company will have grown Free Cash Flow annually on average 12.3% per year since 2006– a worthy testament to MIC’s operating prowess.

With the convertible note proceeds, MIC is purchasing the remaining 50% that it does not own of IMTT for $910 million in cash and $115 million in stock. The purchase price is 10.7 times twelve month trailing Enterprise Value/EBITDA ended March 31, 2014. Trailing twelve month EBITDA was $279.6 million. MIC purchased its original stake in the business in 2006 and sees several opportunities to increase cash flow including improved operations, a simplified corporate structure and the elimination of a double layer of taxation.

Operating Segments

The four operating segments include:

  • International Matex Tank Terminals leases liquid storage facilities for such commodities as petroleum and chemicals at 10 US facilities and 2 Canadian facilities.
  • Hawaii Gas provides gas and related services.
  • Atlantic Aviation provides fuel and other services for general aviation aircraft at 63 airports in the US.
  • Contracted Power and Energy (CPP) owns and operates five solar plants with a total of 57 MW which sell electricity under long-term power purchase Agreements. The segment also owns 50.01% of a business that provides cold and hot water to buildings for cooling and heating, primarily in Chicago.

Total revenue was $1.04 billion in 2013 and $1.03 billion in 2012.

A year-over-year first quarter breakdown of segments by revenue and income is:

Source: MIC 2014 Q1 10Q

Source: MIC 2014 Q1 10Q

Valuation

Net Debt to EBITDA has decreased steadily as Free Cash Flow has risen. Net Debt to EBITDA improved to 4.15 at the end of 2013, from 5.98 at the end of 2012 and 7.03 at the end of 2011. Over that time, Total Liabilities have decreased and both Cash and EBITDA have risen. After the transactions, MIC expects Net Debt to EBITDA to be 4.0.  Given MIC’s familiarity with the IMTT business and Free Cash Flow guidance, there is room for either improved leverage ratios or cash to purchase additional assets, further growing the company.

On the IMTT acquisition news, MIC stock jumped over 10 percent to approximately $68, clearly underlying the broader market’s enthusiasm for the deal. At 68, the equity trades at 13.69 times trailing EBITDA/Share. As a comparison point, Crown Castle International, which leases cell towers in the US and Australia trades at 13.5 trailing EBITDA/Share.  Also, at 15 times expected 2014 cash flow, MIC stock is not cheap, but given MIC’s consistent performance and Free Cash Flow Guidance, we think there is room for the stock to appreciate over the life of the convertible bond.