Shares in Sydney Airport Holdings Ltd (ASX: SYD) traded flat today after the company announced it has raised US$900 million ($1.2 billion) on debt capital markets to repay bank debt, unlock liquidity and fund investment.
The Fairfax press reporting that the debt has been priced at a coupon of 3.625%, which reflects the strong investor demand for the stable cash flows offered by a monopoly asset such as Sydney Airport.
The Airport reported that under the deal its average debt maturity has been extended five months to mid-2023, with less than 15% of the outstanding debt due in any one year.
The shares are up 21% over the course of the past year as the airport continues to report strong growth in international passengers due to additional seat capacity offered by multiple airlines. This is a symptom of the lower Australian dollar fuelling demand for seats from international visitors who now view Australia as a more reasonably priced holiday destination.
In March 2016 foreign inbound tourism grew 10% over the prior corresponding month, with Chinese visitors up 19.7% for the FY16 year to date.
Larger numbers of visitors (especially from Asia) is a long-term trend unlikely to reverse and the airport offers a yield of 4.2% based on current valuations.
However, this key piece of infrastructure trades on a very high multiple of earnings thanks to its cash-generating qualities and today’s low growth world where 10-year US treasuries currently offer a return of just 1.893%.
These below-average returns on government and other investment grade debt are the other primary reason behind the appreciation in the value of Sydney Airport equity – as big-hitting sovereign wealth funds, pension funds and institutions chase yield and somewhere to park their mountains of cash.
Sydney Airport investors then would do well to watch out for a steepening in the yield curve as medium-to-longer-term debt offers better returns and the downside risks in owning equity in the airport increase.
In my opinion expectations for gradual hikes in the US Fed’s cash rate suggest the sky-high level of Sydney Airport shares may hit some turbulence over the next 12-18 months.
Other expensively priced infrastructure assets like Transurban Group (ASX: TCL), Auckland International Airport Ltd (ASX: AIA) and Macquarie Atlas Roads Limited (ASX: MQA) may also come under price pressure.
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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.
You can find Tom on Twitter @tommyr345
The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.