BT: This could be the year when infrastructure trusts wow the market (10 Jan 2007)

This could be the year when infrastructure trusts wow the market

By MATTHEW PHAN

WATER specialist Hyflux has acted on an idea it has tossed around for years: it has injected its stake in the Tuas desalination plant into a business trust that has exposure - albeit indirectly through a larger Temasek-sponsored trust - to the public markets.

The move positions Hyflux on the cusp of a highly interesting movement in the global and Singapore markets: the growing use of infrastructure-backed trusts to earn profits for investors and free up capital for asset-holders.

With global investment banks like Goldman Sachs and Macquarie raising several billion dollars to invest in infrastructure, there is little doubt of the worldwide interest in such investments. In Singapore, too, structured products are becoming more acceptable - witness the recent listing of Babcock and Brown Structured Finance Fund, which was 23.8 times subscribed and raised over $380 million, followed by that of Australia's MacarthurCook Property Securities Fund, which raised $27 million and was fully placed.

The Singapore market is expected to see more infrastructure trusts listing in the first half this year, with larger and more diversified deals. The first of these has already arrived - with CitySpring Infrastructure Management, the trust sponsored by Temasek Holdings, with an estimated asset size of $372 million.

Encouraging similar listings will be the tax incentives introduced last September by the Monetary Authority of Singapore (MAS), which should help Singapore replicate its success with real estate investment trusts (Reits) in the field of business trusts. These include tax exemptions for investors on the interest income they earn from lending to qualifying infrastructure projects, or on interest earned overseas by infrastructure funds or other entities listed on the Singapore Exchange (SGX).

Investment bankers say these incentives overcome a lack of tax transparency that previously made business trusts less attractive. Tax transparency, as enjoyed by Reits, means that earnings are taxed at the unit holder and not the trust level; further, individuals are exempted from taxes on distributed income.

Tax transparency

Previously, only assets with particular tax features were worth injecting into a trust. For example, the bulk of Pacific Shipping Trust's income is exempt from Singapore tax due to its role in the shipping industry. But the new tax incentives overcome this lack of tax transparency for infrastructure assets, and strongly positions the Singapore business trust in a competitive capital market.

Utilities are the most likely source for this sort of stable, cash-generating assets, as the income earned by assets in other industries could be too volatile, a banker also said.

But it remains unclear if SGX-listed trusts will behave like their Reit counterparts. Although a Reit is structured like a yield instrument, observers have pointed out that SGX-listed Reits demonstrate characteristics of a stock, with large capital gains given to the market, and perhaps increasingly, expected by the market. This has been attributed to asset revaluation and opportunities for yield-accretive acquisitions.

Further, trusts - especially the more complicated products - are used by institutional investors to diversify the sector and country risks, while providing a steady yield. If sophisticated investors are looking to diversify risks through investing in a trust rather than to trade the units for capital gain, what does this mean for smaller investors looking for returns and with less need to hedge their portfolios so precisely?

Interesting times are ahead for the trusts industry, with Hyflux's latest move just the beginning. As Low Kah Keong of Wong Partnership's Funds & Regulatory Practice says: 'The CitySpring IPO, when completed, will be an interesting test case for investors' interest in infrastructure plays.'

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