Preserving and enhancing value through active asset management
The increase in short-term interest rates across all jurisdictions over the past 12 to 18 months has led to a renewed emphasis on treasury management and optimisation. During the reporting period, we have finalised cash pooling arrangements in the UK and Canada to maximise interest generated on cash deposits of our Portfolio Companies.
Value-accretive activities, including effective lifecycle cost management, Portfolio Company savings, change order revenue, tax and treasury management and optimised cash reserving, contributed approximately £18.5 million to the NAV. The operational performance of the Portfolio Companies continued to be strong. Through our active value-driven approach to asset management and the robustness of our portfolio, we have achieved an asset availability level of approximately 99.9 per cent. Deductions were either borne by third-party facility management companies and road operators or were part of planned expenditures. There were no material lock-ups, default events or covenant breaches in the underlying debt financing agreements reported during the year. This means that all our investments contributed to our strong dividend cover with portfolio distributions ahead of projections. We are very proud of this achievement.
High-quality inflation linkage
During the reporting period, inflation rates began to decline but remained at elevated levels in the jurisdictions where BBGI invests. Similarly, the volatility in long-term interest rates during 2023 had an impact on discount rates.
Our equity cash flows are positively linked to inflation at approximately 0.5 per cent. If inflation is one per cent higher than our assumptions for all future periods, returns should increase from 7.3 per cent to 7.8 per cent. We achieve this high-quality inflation linkage through contractual indexation mechanics in our Project Agreements with our public sector clients at each Portfolio Company and update the inflation adjustment at least annually.
We pass on the indexation mechanism to our subcontractors – on whom we rely on to support our assets’ operations – providing an inflation cost hedge to manage effectively our cost base. The Portfolio Companies enter into facilities management and operating subcontracts that mirror the inflation arrangements contained in the Project Agreement. In the UK, Project Agreements tend to have a Retail Price Index (‘RPI’) adjustment factor, while other regions commonly use Consumer Price Index (‘CPI’) indexation. However, some Project Agreements have bespoke inflation indices that reflect expected operations and maintenance costs.
The extent of a Portfolio Company’s linkage to inflation is determined by the portion of income and costs linked to inflation. In most cases, cash flows are positively inflation-linked as the indexation of revenues is greater than the indexation of expenses.
The high-quality and defensive nature of our inflation linkage is underpinned by:
- Contractual increases: The adjustment for inflation is a contractual component of the availability-style cash flows for each Portfolio Company, supported by creditworthy government or government-backed counterparties in AA to AAA-rated countries. While other types of assets may offer a strong theoretical inflation linkage (e.g., the ability to raise prices in response to an increase in CPI), they may be subject to changes in elasticity of demand. For example, toll roads and student accommodation projects may have the potential to increase prices in response to an increase in CPI but may be hindered by market demand from increasing revenue, while costs may simultaneously rise. Such assets would therefore need to be priced at an appropriate risk-adjusted basis.
- Protection against rising costs: We transfer the indexation mechanism to our subcontractors, who are crucial in supporting the operations of our assets. This arrangement serves as an inflation cost hedge, helping us to control efficiently our cost base. Similarly, in most cases, the risk of energy cost increases rests with our public sector client or has been passed down to the subcontractor.
- No dependence on regulatory review: The inflation adjustment is automatic and contractual and is not subject to regulatory review or substantial lags. Once the relevant reference factor is published, the adjustment is mechanical.
- Portfolio approach: Our inflation linkage comes from diverse Portfolio Companies in different countries.
Prudent financial management
Our assets continued to perform well during the reporting period with cash receipts during the period ahead of projections. Our net cash position as of 31 December 2023 was £9.7 million with no cash drawings outstanding under the RCF.
We have efficient cash management in place, which aims to avoid cash drag. We employ a proven financing strategy by initially drawing on our RCF to bridge finance acquisitions, with the cost of borrowing being 165 basis points (bps) over the reference bank rate. Subsequently, we raise new equity or use free cash flows generated by the Portfolio Companies to repay the RCF, thereby clearing the temporary debt. The committed amount available to the Company from the RCF is £230 million, which matures in May 2026. Furthermore, the Company has the possibility of increasing the quantum to £300 million by means of an accordion provision. This provides us with the ability to execute larger acquisitions in an efficient manner, and ensures we are a trusted and repeat partner in our key markets.
We have managed our RCF with prudence and discipline, expanding our portfolio without overleveraging our financial statements and acknowledging that the equity capital market is not perpetually accessible. In 2022, we utilised our RCF to secure two new assets — the John Hart Generating Station in Canada and the A7 Motorway in Germany — for approximately £64.4 million. The RCF drawings for these acquisitions have been fully repaid using surplus cash flows generated by our portfolio, showcasing our capacity for organic growth without resorting to external capital resources.
Each of our Portfolio Companies is financed on a non-recourse basis, with 55 of our 56 assets securely financed and not subject to refinancing requirements. One Portfolio Company has a refinancing obligation in December 2025. However, the Portfolio Company benefits from a hedged base market interest rate and is therefore only sensitive to changes in lenders required margins over base interest rates. In line with our loan agreements, we maintain substantial cash reserves within these Portfolio Companies. As at 30 September 2023, BBGI’s proportionate share in the total cash balances held by the Portfolio Companies was approximately £385 million , an amount equivalent to 36 per cent of our NAV.
Our strategic hedging policy has enabled us to mitigate the effects of foreign exchange fluctuations. Moreover, we have adopted a proactive treasury management approach to optimise the interest earned on the reserve accounts of our Portfolio Companies.
Despite the increasing cost pressures attributed to heightened levels of inflation, our diligent approach to cost management has allowed us to maintain our ongoing charges at a competitive level of 0.93 per cent.
Selective acquisition strategy
Our commitment to disciplined growth is centred on enhancing shareholder value, reinforced by our unique internal management structure, rather than merely increasing assets under management. As the only internally managed equity infrastructure investment company listed on the London Stock Exchange, we are confident that our governance model ensures the interests of our management are in harmony with those of our shareholders.
We adhere to strict criteria when evaluating new investments, carefully weighing the relative appeal of different capital deployment options, all the while keeping an eye on the long-term strategic objectives, including the desire to maintain or lengthen the life of the portfolio. We will continue with this judicious approach as we pursue sustainable growth and value creation for our shareholders.