Keppel Infrastructure Trust – Basslink goes under as long expected, no impact to our call
- KIT’s long troubled Australian subsea cable subsidiary Basslink put under voluntary administration as it struggles to meet dues to counterparties and lenders
- No contractual recourse to KIT under the financing arrangements and KIT does not rely on Basslink’s cash flows for distributions, so no impact to DPUs expected
- Our TP takes into account probability of worst case scenario of Basslink’s penalty awards being borne by parent company KIT
- Maintain BUY with TP of S$0.60 for enviable dividend certainty and inorganic growth prospects
Basslink enters insolvency proceedings eventually. KIT’s embattled subsidiary Basslink has entered into a voluntary administration process, with companies in the Basslink group appointing personnel from Ernst & Young as voluntary administrators. This comes on the heels of the unsuccessful sale process with APA Group and the ongoing disputes with offtaker Hydro Tasmania, wherein the standstill agreement with Hydro Tasmania and the State of Tasmania had expired on 27 October 2021, making Basslink liable to pay up penalties and damages awarded earlier by the arbitrator, totalling more than A$100m, as detailed below. This is not a very surprising development, in our view, but should not impact KIT too much, given the ringfencing it has from Basslink level dues.
Unable to find a suitable payment solution. Basslink’s balance sheet remains stretched, with significant loan refinancing due, and free cash flow generation is not sufficient to meet the payments at one go. Basslink had been reviewing its position and options related to the following: i) the arbitration award and costs of A$39.5m and A$7.2m due and payable to the State of Tasmania following the expiry of the above mentioned standstill agreement, ii) approximately A$33.3m and A$25.3m letter of demand from Hydro Tasmania under the services agreement and arbitration costs and iii) forbearance from the lenders in regard to the outstanding loans of more than A$600m. Basslink had been trying to negotiate with counterparties and lenders and had made several proposals for a resolution of issues and offered several proposed repayment plans for the arbitration award payments, according to the announcement. However, as a result of the cessation of discussions with APA Group with respect to the proposed sale of Basslink and the ongoing disputes with Hydro Tasmania, there appears to be no options remaining on the table, and thus the directors of the respective Basslink companies decided to place Basslink under voluntary administration, with the long-term interests of Basslink’s creditors, employees and other stakeholders in mind.
What is voluntary administration and what happens next? Voluntary administration is designed to resolve a company’s future in case of insolvency issues. An independent registered liquidator (the voluntary administrator, in this case EY) takes full control of the company, and tries to find a way, if possible, to save the company. If the company or business cannot be saved, then he will try to get a better return for creditors than if the company had been wound up immediately. In Basslink’s case, the administrators will first undertake a preliminary review and assessment of current operations, and over the next few weeks, assess the best options for the business with a view to restructuring it. This may involve selling assets piecemeal.
Non-recourse to KIT. KIT is the owner of Basslink, but given that there is no contractual recourse to KIT under the financing arrangements currently in place for the Basslink Interconnector and KIT does not rely on Basslink’s cash flows for distributions, the abovementioned events is not expected to have any material impact on KIT’s distributable cash flows or DPUs in the foreseeable future. Even in the very unlikely event that Basslink’s penalty awards needs to be borne by parent company KIT, that implies a 3% hit on our valuations, and we have already factored this into our valuations by assigning some probability to this event. However, the negative newsflow regarding Basslink continues to be irritant and overhang on share price. Nevertheless, given healthy sustainable yields of more than 7% and possibility of further inorganic growth in the works, we maintain our BUY call with a TP of S$0.60.