(Bloomberg Markets) -- Brookfield Infrastructure Partners LP’s $15 billion commitment last year to help finance Intel Corp.’s giant new semiconductor complex in Arizona, the first deal of its kind, sent investors and bankers racing to find similar opportunities.
Brookfield, a major infrastructure investor, put up $2 billion in equity and borrowed $13 billion from a mix of foreign banks, pension funds and sovereign wealth funds, according to people familiar with the matter, who asked not to be identified because the details weren’t public. That model isn’t new to infrastructure assets, just to semiconductors, says Scott Peak, Brookfield Infrastructure’s chief investment officer for North America.
For Intel, bringing in a deep-pocketed investor to cover 49% of the plant’s cost helps to support finances stretched by an unprecedented expansion plan, a tough competitive landscape and a steep industrywide downturn. (In late January the chipmaker gave one of its gloomiest forecasts ever, sending shares tumbling.) When the deal was announced in August, Intel described Brookfield’s rate of return as “somewhere between its cost of debt and equity,” which it pegged between about 4% and 8.5%. Intel declined to provide more details.
How the investment plays out will demonstrate whether private equity firms and their growing infrastructure funds can be part of the plan to reassert US competitiveness in chip manufacturing. Governments in North America and Europe are trying to rebuild that strategic capability and reduce their reliance on plants in East Asia. Brookfield’s Peak estimates that $1 trillion of capital is required for what Brookfield considers “large-scale critical manufacturing” in areas such as semiconductors, aerospace, auto and gigafactories, data management and telecommunications.
“There are a lot of infrastructure categories that are well-established that were not on an investor’s radar 5 or 10 years ago—think data centers, towers and fiber,” Peak says. “New asset classes evolve, and with them come new models and contractual arrangements that attract the right investor base.”
The growing need for semiconductors and the high valuations of companies such as Taiwan Semiconductor Manufacturing Co. have attracted interest from investors. Firms including KKR & Co. and Blackstone Inc. have raised war chests to invest in the space as the definition of infrastructure stretches beyond toll roads and ports to data centers, cellphone towers and fiber networks. In December, AT&T Corp. and a unit of BlackRock Inc. announced plans to form a joint venture that will provide internet service to US customers outside AT&T’s traditional 21-state local phone territory.
Intel, which named the new funding model SCIP (sounds like “skip”), for semiconductor co-investment program, is already being contacted by investors with access to pools of private capital looking to form partnerships on other fabrication plants, known as fabs, in Ohio and Germany, according to people familiar with the matter. Intel Chief Executive Officer Pat Gelsinger said in January that the company expects to create a second SCIP this year.
“Given the multiyear horizon of our investments in capacity and product road map, we are focused on creating multiple pools of capital to support our strategic investments and enhance our flexibility, which is particularly important during short-term periods of business disruption,” says Dave Zinsner, Intel’s chief financial officer. SCIPs “provide the added benefit of better aligning our capital requirements with our cash-flow-generation timelines, as new fabs typically require more than two years of investment before coming online and generating revenue.”
Building plants and making chips require expensive state-of-the art technology that can become obsolete in as little as five years. That makes it riskier than the projects infrastructure investors are accustomed to, which remain in use for decades. So, unlike a traditional joint venture in which profits and losses are shared according to each partner’s investment, in this deal Intel provided Brookfield with some protection against losses. On the flip side, if the plant proves more profitable, most of the benefits will accrue to the chipmaker.
In the eyes of rating companies, that downside protection negates one benefit of the deal: that Intel can keep about half of the cost off its balance sheet and preserve its credit rating. Instead, the rating companies view Intel’s guarantee to Brookfield as debtlike. That may affect companies’ willingness to embrace similar deals, says Jason Pompeii, an analyst for Fitch Ratings. Financing multiple projects in the same way could weigh on Intel’s credit rating.
Intel could tweak the structure of future partnerships to make the deals less debtlike, and it’s getting help from Goldman Sachs Group Inc., people familiar with the matter say. The company should also benefit from subsidies and other incentives in the US Chips and Science Act, which is designed to boost domestic production of semiconductors.
For Intel’s Gelsinger, the Brookfield deal helps fund one of the first steps in his plan to remake the company and reclaim leadership in the $580 billion industry it once dominated. He’s introducing new technology at a faster rate than ever to make Intel’s plants the world’s best. The company is also building factories across the US and Europe to produce its products, as well as to manufacture for other companies, even rivals.
The rate on the Brookfield financing now looks attractive, as inflation has sent the cost of borrowing up steeply. But in the high-stakes game of semiconductor manufacturing, success will depend on whether Intel can keep those factories producing high-priced electronic components at maximum capacity. As one of the world’s few remaining large-scale manufacturers of semiconductors, it has an advantage. Work at existing plants in Arizona, Oregon, Ireland and Israel could be shifted to the new factories to make sure they’re performing at levels that will ensure the deal’s terms don’t become burdensome.
Deals beyond semiconductors could follow, says John Buchanan, a Lazard Ltd. banker who advised Intel. “It’s a chance for companies with big physical assets to raise money at an attractive relative rate,” he says.