"In terms of cash flows, it is performing substantially below the expectations it [Macquarie] had when it signed the syndicated loan a few years ago," says a hedge fund manager who has been watching the road's performance. Macquarie denies this, saying that the road is "performing well" and pointing to a 5% increase in traffic over the past three months. More than 14 million customers used the road last year.
The wrangling over the M6 Toll's performance has wider implications than the health of Macquarie's infrastructure portfolios. With cash in short supply over the next four years, the government is urging local authorities and businesses to consider toll roads to replace schemes that fell victim to the cuts in last week's spending review.
"If people come up with a workable business plan for a new toll road, we will look at it," a government source says. "We will also look at it favourably if there is not much capital required from government." Those words will be read closely by local authorities and businesses looking to expand the A14 in Cambridgeshire, widen the A19 outside Newcastle, and add extra lanes to the A1 in north Yorkshire. Toll roads may be their only hope.
If the notion of broader, metered, road-user charging remains a political taboo, thanks to heated public opposition, there is at least a more reasoned debate over tolls. Indeed, tolls are prevalent on the continent where drivers in France, Spain and Italy are used to paying to travel on some major thoroughfares. The RAC Foundation, a motoring think-tank, is pushing the radical solution of privatising England's major roads, or at least placing them in a trust. While that scenario remains anathema to mainstream politicians of any stripe, it harbours a logic that underpins tolls: roads have strong financial potential if they can be prised out of public ownership. Nine out of 10 passenger journeys are by road – and traffic, including freight, is forecast to grow by around 25% by 2025. For years to come there will be a steady, growing stream of drivers and companies who will be willing to pay for a less congested journey.
"There are some roads where tolling could be made commercially viable," says Stephen Glaister, the RAC Foundation's director. "I see no objection to tolls, especially when they are providing alternative routes to existing ones. The road network is extremely viable financially, so you would expect new additions to it to be able to wash their faces."
Under the coalition government's vision, private capital will replace state investment and will flow to the opportunities provided by traffic-choked routes on Britain's road network. Glaister believes that the M6 north of Birmingham and the A14 are ripe for conversion to toll roads, or for the construction of parallel toll lanes.
"The demand is strong and growing. As the economy recovers, there are locations where there is severe congestion, and the A14 is one of them," he says.
Amid the entrepreneurial clamour, the M6 stands as a cautionary tale. The Campaign for Better Transport (CBT) has riled Macquarie by producing a report that claims the toll has failed to reduce traffic on the M6 and that using the toll road itself does not make for markedly speedier journey times.
"In many cases the justification for these roads is to relieve town centres and existing roads of traffic. If you just toll the new road, all the traffic will stay on the old road – that is what our research into the M6 Toll shows," says Stephen Joseph, CBT's executive director.
Macquarie fired off a letter in response stating that the road's finances were "stable". The letter added: "The private sector can, with the right framework, build new motorways off the government balance sheet."
Nonetheless, hedge funds are talking to the banks involved in the original £1bn syndicated loan for the road, which include Spain's Santander and France's Crédit Agricole.
Some banks, such as Santander, say they are not considering any sale of the loan in the secondary market. Others have said they would sell their loans at 70p to the pound – too high for the hedge funds, who want to pay between 30p and 40p.
Opportunistic hedge funds focused on distressed debt are always seeking opportunities to buy corporate loans at a heavy discount to their face value. Once they are holding the financial levers, they hope to stir changes in strategy or ownership.
The funds, usually working in a co-ordinated manner, sometimes buy debt on a "loan-to-own" basis. By purchasing loans just before a company breaches a banking covenant, they aim to obtain the right to call in the administrators. Under that threat, hedge funds swap their debt for equity, seizing control of the firm.
Another approach is to force a debt restructuring, extending the debt's maturity, or changing the terms of the loan to sell the debt at a much higher price than they originally paid.
The operator "hasn't breached any covenant – yet," the hedge-fund manager says. "It is a balance-sheet problem. It has too much debt and it thought it would generate more revenues."
In its latest published accounts for the year to 30 June 2009, M6 Toll's operating company, Midland Expressway, said it had net debt of £723m, and it posted a loss of £26.1m, mostly as its operating profit was eaten by interest charges of £58m.
Excluding debt repayments, operating profit fell to £32m, down from £34m the previous year, after being hit by "the weak UK economy and improved capacity on the competing networks," the company says. The road has made a loss every year since it launched but Macquarie has always warned that it would take a decade to break even.
Infrastructure and energy deals have made millions for vulture funds. In 2003, funds including BlueBay, Centaurus and Orretta, bought the debt of Drax, Britain's largest power station, at a substantial discount, after US owner AES walked away from its money-losing investment. The funds were expecting a recovery in electricity prices, which shot up shortly after their purchase. Bondholders then swapped their debt for equity, floated the power station on the London Stock Exchange in 2005 and cashed millions of pounds.
For the M6 Toll, a debt sale is unlikely until next year, as the selling banks are not thought to be in a rush. But it will hardly be a shining precedent for private-sector road funding if Britain's first pay-to-drive motorway gets consumed by a pack of vultures.
