A Good Damning Analysis of Asian Pay Television Trust (APTT) and Macquarie’s Financial Engineering

Many readers will know my take on this APTT IPO and its prospects. To be honest i am a bit bias, and you can read most of the rants here (with sub links).

The IPO was very well received and who can blame them when they are being touted as very high yielding.

Over allocation for high networth investors

Macquarie chose to allocate the investors who bided large amounts (> 500 lots) with 70% of their allocations and leaving next to zero for the small ones.

Well that turn out to be well for the small investor because it is currently languishing at 91 cents, 6 cents lower than their IPO price of 97 cents. There is no CRT kind of  explosive first day move.

Comprehensive Analysis on APTT

Still, it is this kind of what i would term “strategic engineering” that make you wonder whether they should focus on helping the shareholders rather than themselves.

Over at Yahoo, my friend actually alerted me to this very detailed analysis on APTT by Kiran Rama from Investor Central.

Let me just say my thanks to him because he did a lot of the hard work that we couldn’t. Macquarie layered a lot of “goodies” in TBC and APTT respectively for Kiran to uncover.

I shall try to highlight some of them. For the full analysis you can hop on over here to read it.

Asian Pay Television Trust – Can it ever make a profit with these interest and hedging costs?

Why did it post a net loss, despite higher revenue, positive cash flow and an EBITDA profit?

The top line seems to be growing.

TBC generates revenue from three business segments: basic cable TV, premium digital cable TV, and broadband.

Its revenue in FY11 and FY12 grew mainly due to an increase in subscribers of premium digital cable TV services.

The growth came on the back of higher premium subscriber numbers, growing 63% in FY11 and 21.7% in FY12.

But the higher growth in FY11 was due to a low base after the re-launch of this service in 2009.

While its EBITDA margin has stayed at 62% for FY10, 59% for FY11 and 55.4% for FY12, TBC made losses for all three years.

Why?

The answer can be found in the cost and complexity of financing its business. Just by glancing at Asia Pay TV’s balance sheet, you can see that its current liabilities exceed current assets.

In addition, the total financial liabilities of S$1.4 bln in FY10, S$1.4 bln in FY11 and S$1.5 bln in FY12 exceed total financial assets of S$39 mln, S$76.7 mln and S$64.5 mln respectively. This liquidity risk is disclosed in the prospectus on pages 140, A-45 and C-57.

It indicates that there would be insufficient resources to meet TBC’s financial liabilities as they fall due.

But the management believes that the liquidity risk is mitigated by positive operating cash flow (OCF).

Let’s dig a little more into its financial liabilities.

TBC’s income statement has a line item called "Interest and other finance costs".

This line item amounts to S$170.2 mln for FY10, S$77 mln for FY11 and S$122.3 mln for FY12.

These numbers, which are higher than its available cash in any given year, are a combination of interest expense, hedging cost, amortization of expenses incurred in financing the debt, and others.

A detailed break up of this line item is given on page C-26 of the prospectus.

Why is it being charged such a high interest rate on its debt?

These hedging costs, or let’s call them losses, are largely related to a US$135 mln new debt facility it arranged in 2010 at an interest rate of 8.25% above LIBOR to refinance its older debt.

What is remarkable about this is not just that this is a substantial premium to benchmark interest rates.

You could even finance a Zimbabwe gold mine for a lower interest rate than that. But also, that the financier of one-third of this debt facility was the ultimate parent company.

Out of the US$135 mln, US$45 mln was financed by Macquarie Capital Group.

Now, we’re not alleging any malfeasance, but it seems to the reasonable observer that the lenders didn’t cut the company much slack.

At the very least it suggests that they see TBC as a credit risk, which is why they are demanding such a high premium for the money they have lent it.

Why is even the parent company earning such high interest from it?

The cash flow statement highlights that TBC has borrowed additional money to run its business.

Not to forget, it refinanced its debt as well, and it plans to do so in future, too. Its debt-to-equity ratio stood at 2.8 times as at December 2012.

It has been paying interest of more than S$50 mln each year.

Summary

There are still much that he have not answered. One pertinent question we have is that, under MIIF, TBC have been rolling over the debts.

Unlike China Merchant Pacific (analysis here), whose underlying toll roads are finance by debt, they are repaying the debts and what China Merchant Pacific paid out is net of debt repayment and depreciation.

Essentially, the dividend is paid out of earnings.

Not saying CMP structure is better, but TBC at some point will have to refinance, or repay debts.

There was one year in the past where TBC paid out less to the parents because they need to repay debt.

Not much is talked about whether they will want to roll over their debt like the REITs indefinitely

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