Brisa Restructuring

The Brisa Case
Corporate Reestructuring
TABLE OF CONTENTS
Company description Industry overview Restructuring rationale 3 5 7
Event description
Company performance Critical evaluation
6
7 8
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Marta Rodrigues da Ponte | Paulo Tapada Santos | Raul Pvoa | Ricardo Esperana | Sara Costa Pinto
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COMPANY DESCRIPTION
Company Overview
Brisa Auto-estradas de Portugal was created in 1972 and has, of today, a market capitalization c. 3 000 mn. Brisa shares are quoted on Euronext Lisbon, where it is part of the main index, the PSI-20. It is also part of Euronext 100 an index which includes the largest companies in France, Holland, Belgium and Portugal and the FTSE4Good, the reference index for social responsibility. Brisas main business area is the construction and operation of tolled motorways, both through direct investments in Portugal, as well as through its national and international subsidiaries. The remaining businesses managed by the company complement its core business providing services associated to road safety and driving comfort in both motorway and urban environments
Source: Brisa Investor Presentation Marta Rodrigues da Ponte | Paulo Tapada Santos | Raul Pvoa | Ricardo Esperana | Sara Costa Pinto

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COMPANY DESCRIPTION
Operational Highlights
1187,3 km, 11 motorways Includes the main road corridors with the highest importance in the Portuguese motorway structure Concession term until 31st December 2035 Tariffs increase at 100% of CP, although from 2012 8.5% of the increase will revert to EP (State) 93% of the Main Concession is tolled, leaving access to the Lisbon and Porto metropolitan areas free of charge (under terms of concession agreement)
Financial Highlights
By March 2012, Brisa total net profit amounted to 10mn Operating revenues totalized 134,7 mn as consolidated operating costs excluding amortisation, depreciation and provisions figured 42,7 mn Total Equity and Non-controlling interests of 1.329,1 mn Total consolidated debt amounted to 4.213 mn mainly focused, per business area, on BCR ( 2.429 mn) through Bonds and EIB and on Project Finance (1.765 mn) through AEDL (854 mn) and Brisal ( 518mn).

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INDUSTRY OVERVIEW
Operational Highlights
Brisa is the leading player in an industry where its competitors are AutoEstradas do Atlntico, Ascendi and Lusoponte
As of 2010, Portugals Total Network Length was of 1.701,3 Kms of motorways. Brisa controled more than 65% which represents little over 18% in terms of Annual Average Daily Traffic
AUTO-ESTRADAS DO ATLNTICO ASCENDI BRISA LUSOPONTE
In Operation (km) 2010 170,0 141,0 1.187,3 24,0
In Construction (km) 2011 70,9 5,6 -
Annual Average Daily Traffic 2010 19.155 33.603 30.634 85.346

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INDUSTRY OVERVIEW
Financial Highlights
Total Revenues in the Industry amounted to 725,3 millions of Euros in 2010 Brisa has a share of over 73% in revenues considering its competitors Investments were not scarce in 2010 but mainly due to Ascendis growth strategy. Brisas investments centered more in Improvements of existing infrastructures
Source:

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RESTRUCTURING RATIONALE
In August 2008, markets were highly volatile, due to the subprime crisis that had begun in the USA, which will directly impact the capacity of some corporate with high leverage ratios (D/V of 75% in December 2008) to refinance its obligations. On the other hand, the macroeconomic forecasts anticipated lower GDP growth and subsequently lower traffic on BRISAs concessions. Thus, in 4th of August 2008 Moddys had revised Brisas long term debt rating from A3 to Baa1 arguing that: the downgrade reflects Brisa's continuing high level of indebtedness following the award of the Douro Litoral concession and delay in the sale of a part of Brisa's shareholding in the Northwest Parkway concession acquired in November 2007 (full document attached) Three days later, Brisa announced that Standard & Poors Rating Service also had reviewed Brisas long term debt rating from BBB+ to BBB, keeping the Negative Outlook, which will worsen the cost of floating debt (document attached)
Source:

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At the end of the year, and following the market researchers worst forecast, Brisa reported earnings of 151 million ( - 41% comparing to 2007) and higher debt level to finance new projects such as Douro Litoral concession. The BRISAs business model assume that Portuguese state periodically has to pay the service provide by BRISA based on the public partnership signed for each project. Although, the sovereign debt also becomes a problem, which could impact negatively the capacity of the Portuguese Republic to fulfill its obligations. So, the EIB, the main debt holder (23,5% of total debt) for the old and most important concessions met with Portuguese Republic and Brisas board in order to spin off the mature concessions and the linked debt into a new company wholly owned Brisa. The transactions was announced in 23rd of December 2008 (attached) having taken two years to be realized due to all the diligences required:
Consent from the Grantor

Due Diligence EIB Negotiation Creation of Brisa O&M
Marta Rodrigues da Ponte | Paulo Tapada Santos | Ratings Raul Pvoa | Ricardo Esperana | Assessement Sara Costa Pinto
Implementation WORLD of new structure
Current Structure as of 2008 According to the marketing material for distribution, the current group structure had become sub-optimal , the main concession was held within the groups top company and financed on a corporate basis, while other concessions were held in separate subsidiaries and funded on project finance basis.
Brisa Concession Douro Concession Brisa Parent Co Main Concession O&M Co Atlantico Concession Baixo Tejo Concession Litoral Oeste Concession International Concessions
New structure proposed Brisa SA became a pure holding company and the main concessions were transferred to a new concession company, the Brisa Concession. On the other hand, O&M activities of the group would be carried out by a new company, BRISA O&M which had promoted great synergies. Finally, and as expected by debt holders (EIB), all the existing corporate debt was transferred to the Brisa Concession
Brisa Concession Douro Concession Brisa Holding Atlantico Concession Baixo Tejo Concession Litoral Oeste Concession Brisal Concession
Brisa O&M

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Main advantages of the corporate structure for debt holders: Following the restructuring, BCRs corporate purpose will be restricted to owning and operating the Brisa concession, and therefore the debt at the BCR level will not be exposed to any new concessions or other business that Brisa S.A. takes on. This differs from the previous structure, where bondholders were exposed to all activities of Brisa S.A. and, as such, the increased stability implied by the new structure is a credit positive. The concession contract, which was amended in December 2008 to allow for a transfer to BCR, does not allow Brisa S.A. to sell any more than 33% of its holding in BCR without the grantors approval, and BCR must continue to own 100% of the concession. As such, it would not be possible for control over BCR to be transferred to another sponsor without the grantors approval, thereby mitigating the risk that transfer of BCR to another weaker, less experienced and less committed sponsor could occur. Furthermore, under the finance documents BCRs board of directors will be required to include a minimum of three independent directors at all times, who will hold veto rights over proposed equity distributions and the execution, amendment, renewal, suspension or termination of any of BCRs contracts. While not a major rating driver in Fitchs analysis, it is clear that this provision enhances the corporate governance of the concessionaire.
Source:

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Main advantages of the corporate structure for shareholders By the debt restructuring agreement, the short term refinance risk almost disappeared given that the average maturity was extended by 5 years as well as the amortizing schedule. Thus, the Brisas financial obligations was reduced in 260 millions until 2015, being free to pay more dividends or retain the dividends to finance new projects.
The mentioned restructure also gave more visibility of assets, allowing clearer portfolio management approach and giving visibility over the value of each business . The spin off also contributed to higher business units efficiency, focusing management team due to the segment approach maximizing the economic and financial potential. Solid financial structure for the entire concession period, allowing a high dividend pay out ratio as well as strong investment grade, which could be attractive among the portfolio managers.
Source:

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In December 2010, Brisa announced to the market the successful completion of the corporate reorganization process which had been prepared during two years and, with the completion of this transaction, the bonds issued by Brisa Concessao Rodoviria SA. (the new entity) become rated A(Fitch) and Baa1 (Moodys)
Source:

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EVENT DESCRIPTION

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COMPANY PERFORMANCE
Our analyses is performed over 3 major periods: 1. Before the announcement (Dec 2005 Dec 23, 2008) 2. Between announcement and effective date (Dec 23, 2008 to Dec 23, 2010) 3. After effective date (Dec 23, 2010 to today) Data Stock Prices on Brisa, Abertis (comparable company) and indexes PSI 20 and SPGTIND Index (S&P Global infraestruture index) Restructuring announcement on Dec 23, 2008 Restructuring conclusion and effective date on Dec 23, 2010 Event Period Analysis: +/- 40 days for announcement and effective dates Methodology Two different analysis were made: 1. Stock performance analysis: comparison of Brisas returns with SPGTIND index for each period referred and event analysis against comparable companies and PSI 20. 2. Financial ratios analysis

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COMPANY PERFORMANCE
Before the announcement Period Brisa outperformed slightly industry index between 2006 and 2007, however since middle 2007 and in a strong way during 2008 Brisa provided a worst return than its industry index leaving abnormal returns to decline as presented in graph. At this time Brisa's stock was suffering from the Portuguese Rating downgrade which led to the decision to implement the restructuring under analysis.
Brisa and SPGTIND index performance - Before announcement
150
100 50
Nov-05
Nov-06
Nov-07
Mar-07
Mar-06
Mar-08
Brisa
SPGTIND Index
Nov-08
Jul-06
Jul-07
Set-06
Jul-08
Jan-06
Jan-07
Mai-06
Jan-08
Mai-08
Mai-07
Set-08
Set-07

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COMPANY PERFORMANCE
Between announcement and effective date The restructuring announcement provided an abnormal return of 1,46% in Day 1 over PSI 20, but the following days and the long run shows a poor performance from Brisa against Portuguese index and its peers as depicted in both graphs.
Brisa and SPGTIND index performance - Between announcement and effective date
150 100 50
Brisa
SPGTIND Index
130 125 120
Stock Evolution between days -40 and 40
115 110
105 100 95 90
85 80
-40 -35 -30 -25 -20 Brisa -15 -10 PSI 20 -5 0 5 10 15 20 Abertis 25 30 35 40 Benchmark - SPGTIND Index

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COMPANY PERFORMANCE
After effective date On the announcement date of restructuring conclusion, stock market didn't give any abnormal return on this day which means stock market have already assumed all effects before this last announcement. In long run we conclude that this restructuring didnt have a positive impact for shareholders as Brisas stock have performed worst than its peers and indexes during the periods under analysis.
130 125 120
Brisa and SPGTIND index performance - after effective date
150
100 50
Jul-11 Dez-10 Jan-11 Set-11 Dez-11 Mai-11 Ago-11 Out-11
Jun-11
Jan-12
Mar-11
Brisa
SPGTIND Index
Stock Evolution between days -40 and 40
115 110
105 100 95 90
85 80
-40 -35 -30 -25 -20 Brisa -15 -10 PSI 20 -5 0 5 10 15 20 Abertis 25 30 35 40 Benchmark - SPGTIND Index
Nov-11
Abr-11
Fev-12
Fev-11

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COMPANY PERFORMANCE
Ratios
EBITDA Margin EBIT Margin Profit Margin Return on Assets Return on Common Eqty Asset Turnover Assets/Equity Current Ratio Quick Ratio Total Debt/Total Equity Net Debt/EBIT EBIT to Interest Expense Net Debt/Equity Cash Flow-Oper Activities Capital Expenditures Free Cash Flow
2004
75,2% 56,3% 34,2% 4,4 13,3 0,1 2,7 0,6 0,5 148,3 7,1 3,3 145,4 340,5 189,1 151,4
2005
73,4% 52,8% 53,2% 7,1 19,0 0,1 2,7 0,5 0,4 146,5 7,0 3,5 127,3 323,9 348,0 24,2
2006
74,7% 52,5% 29,9% 3,8 10,6 0,1 2,8 0,7 0,7 164,1 8,0 3,7 151,0 298,5 525,7 227,2
2007
73,8% 45,2% 41,7% 5,3 16,4 0,1 3,2 0,6 0,5 196,3 11,4 2,5 189,6 335,4 801,1 465,7
2008
76,0% 43,6% 23,9% 2,8 10,2 0,1 4,1 0,4 0,3 279,1 13,3 1,6 268,9 547,1 621,6 74,5
2009
68,0% 33,6% 23,2% 2,7 11,3 0,1 4,0 0,4 0,3 262,7 15,4 1,5 249,9 444,4 107,4 337,1
2010
53,5% 8,1% 120,4% 13,7 48,7 0,1 3,2 2,5 2,4 187,8 42,2 0,4 116,1 420,0 108,7 311,3
2011
73,1% 42,4% -13,0% -1,3 -4,8 0,1 4,9 1,4 1,3 339,2 13,2 2,0 265,9 164,3 76,5 87,9
Higher interests have affected Brisa in recent years, which decreased substancialy the profit margin. The profitability deteriorated in last year 2011 (Profit Margin, RoA,RoE); Financial leverage and liquidity have increased significantly in book and market value since 2010 In the last years, less traffic lowers the capex (since some of widening projects do not became necessary), which give the change to improve the Free Cash Flow

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COMPANY PERFORMANCE
Brisa Peers Comparison
P/E EV/EBIT P/Book Dividend yield (%) EPS adjusted Brisa Abertis Atlantia Brisa Abertis Atlantia Brisa Abertis Atlantia Brisa Abertis Atlantia Brisa Abertis Atlantia Current 2011 2010 2009 2008 2007 2006 2005
n/a* n/a* 3,9 27,6 20,6 22,8 33,8 14,3 7,4 13,6 17,1 16,5 14,2 20,1 25,0 24,0 8,8 10,9 13,0 18,3 10,4 40,3 18,8 18,2 18,1 17,8 100,0 34,7 24,6 32,6 27,1 21,5 15,6 16,3 17,6 18,3 16,6 18,8 19,9 19,8 9,8 10,1 10,8 12,7 11,1 15,7 13,9 14,0 0,9 0,9 1,6 3,2 2,3 3,6 3,6 2,6 1,8 3,0 2,4 2,5 2,5 3,6 3,9 4,1 1,6 2,2 2,8 3,6 2,0 4,1 3,5 3,7 12,6 12,2 5,9 4,3 5,8 3,1 3,0 3,8 3,4 2,9 4,5 3,8 4,8 2,5 2,2 2,4 4,0 6,0 4,9 4,1 5,4 2,6 1,6 1,5 -0,2 -0,1 0,3 0,3 0,3 0,4 0,3 0,5 1,3 0,9 0,8 0,8 0,8 0,9 0,7 0,6 0,9 1,1 1,1 1,0 1,1 1,0 1,0 1,0
* negative earnings
Brisa is relatively less cheaper than Peers, Based on multiples, we prefer Abertis and Atlantia, because in our view they provide the most attractive risk-reward balance, with appealing earnings growth.

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CRITICAL EVALUATION
Brisa share price evolution seems to underline the deployed restructuring has not been value creative (eg there was value destruction) in absolute terms as Brisas closing price has been, since the effective date, below its first day price; and relative terms as Brisas performance was more negative than its peer (Abertis) as well as industry benchmark In our view, such disappointing performance was due to the following factors: i) Weak portuguese traffic: significant global drop in traffic in the recent years ii) Downgrades in the Republic of Portugal rating : Brisa is inable to totally disconnect itself from the local economy and market circunstances, so it is expose to the stresses in the Portuguese debt markets; iii) Poor outlook for the motorway markets iv) Difficulties to find new investment with attractive ROI, not only internally but especially abroad. Brisa is in consolidation stage where no significant growth is expected in the following years v) Fuel Prices: high fuel prices which had a significant role in the traffic behaviour

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CRITICAL EVALUATION
Outlook for Brisa: High risks remain. We forecast challenging times ahead for Brisa due to : 1) a weak Portuguese economy, delayed recovery due to structural problems and low productivity, 2) the company being financially stretched with a strong probability of dividend cuts by 2013, 3) Further credit rating downgrades of BCR's debt (as directly linked to Portuguese sovereign debt rating) resulting in rising refinancing risks and costs, 4)increasing operational weight of non-profitable subsidiaries, and 5) High correlation to Portuguese bond yields.

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The Brisa Case

LEARN HOW TO HEALTHE

LEARN HOW TO HEALTHE

LEARN HOW TO HEALTHE

AUTO-ESTRADAS DO ATLNTICO ASCENDI BRISA LUSOPONTE

In Operation (km) 2010 170,0 141,0 1.187,3 24,0

In Construction (km) 2011 70,9 5,6 -

Annual Average Daily Traffic 2010 19.155 33.603 30.634 85.346

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Consent from the Grantor

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Implementation WORLD of new structure

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130 125 120

Stock Evolution between days -40 and 40

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Brisa and SPGTIND index performance - after effective date

Stock Evolution between days -40 and 40

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LEARN HOW TO HEALTHE

LEARN HOW TO HEALTHE

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