Oaktree Capital Management (OAK) - Get Report has been reportedly exploring a sale of its stake in the consortium that operates Puerto Rico's largest airport, as the alternative asset manager looks to monetize its turnaround in what was just three years ago a faltering public infrastructure asset.
Coming so quickly after the government of Puerto Rico agreed to sell the distressed airport's operations, any transaction could underscore the gap between government operations of public facilities and private equity's ability to wring efficiencies out of assets.
According to a Reuters account, Puerto Rico officials valued the airport concession at $2.6 billion when it was awarded in 2013. However, at the time, only half the airport's capacity was being utilized. Meanwhile, the government in Puerto Rico was wrestling with its $70 billion debt crisis, prompting it to sell some assets to raise capital. The right to operate the airport was the second leading asset that the government sold.
The operational turnaround has clearly been significant at the sputtering facility, known as Luis Munoz Marin Airport. When the government of the U.S. territory was exploring the sale of the rights operate the airport in 2011, traffic had declined 6% year over year.
In August of this year, traffic at the airport improved 5% year over year, according to Mexico's Grupo Aeroprtuario del Sureste SAB de CV, known as ASUR, the other 50% stakeholder in the lease to operate Puerto Rico's largest airport. The joint venture is known as Aerostar Airport Holdings.
The turnaround comes despite some significant overhangs that would have made the task of reversing the fortunes of the facility difficult: along with Puerto Rico's continuing debt crisis, the island has been contending with a decade-long recession, as well as the hit to tourism owing to the outbreak of Zika, the mosquito-born virus that has struck as many as 20,000 natives. For instance, Major League Baseball canceled a pair of games scheduled to be played in Puerto Rico earlier this year.
There's also been an uptick in competition in the Caribbean, following the lifting of the trade embargo on travel to nearby Cuba.
In addition, the Aerostar operation is on the hook for the payment to the government of Puerto Rico of $62 million a year, which equates to roughly 60% of total revenues, regardless of passenger volumes, according to a report from Moody's Investors Service. After five years, the fixed payment converts to a revenue-sharing model.
When the lease agreement was struck in 2013, ASUR and its then partner in the transaction, Highstar Capital, agreed to a $615 million upfront payment. Highstar Capital, an infrastructure investment manager, was acquired by Oaktree in June 2014.
The partnership funded the upfront payment with a debt issuance of $350 million, as well as revenue generated by its own airport operations. ASUR operates nine airlines in Mexico, including the popular destination of Cancun, while Highstar operated one small airport in the United Kingdom. The annual revenue-sharing payments are estimated to add up to $552 million over the life of the contract, according to Reuters.
Aerostar is also obligated to invest $1.4 billion in facility improvements during its operation of the assets.
At the onset of bidding on the lease to operate the airport in 2011, as many as 12 parties bid on the contract, according to trade press reports. That dropped to two in the final round of bidding: Aerostar faced a partnership that included Macquarie Infrastructure.
Presumably, Oaktree is thinking the easy money made on turning around the San Juan airport has been scored, and looks to get out before the efforts to further monetize the investment become a little harder to exploit. Oaktree did not respond to requests for further comment. (ASUR also did not respond to requests for comment.)
Nevertheless, the private investment partnership not reversed a declining situation that the government of Puerto Rico - while, obviously, facing more than a few other distressed circumstances amidst its credit crisis - proved unequal to attend.
Somewhat ironically, Howard Marks, the co-chairman and founder of Oaktree, who is well-known for his "memo" style musings on the economy, said in a recent update, "I don't claim that people in the private sector 'do God's work.'"