2012: What can we expect? (Part 2)

We asked leading professionals in the infrastructure asset class for their thoughts on what next year has in store. Today’s opinions come from Gershon Cohen, Hans Meissner, Paul Kraske and Tony Mallin.

Gershon Cohen, managing director and global head of project finance wholesale banking and markets, Lloyds Banking Group

Gershon Cohen

My view is that the road ahead will be long and challenging but exciting too. In a worst-case scenario, and if another liquidity squeeze similar to the one that brought the market to its knees in 2008 rears its head during 2012, infrastructure financing activity from banks could easily fall away. We cannot afford to wait around to see what happens and we must be resourceful in identifying other sources of capital and funding for the future success of our economies. 

A by-product of all of this ambiguity is the amount of intellectual capital being expended within my institution and others in looking at alternative models to attract different types of institutional investment into all layers of the capital structures of infrastructure projects. There is a lot of institutional capital in this world with investors looking for a safe home which infrastructure can provide. Delivering a committed financial offering as part of the bid process just became a whole lot more complex.    

Hans Meissner, managing partner, Eiser Infrastructure

Hans Meissner

Assuming that the Euro crisis can be brought under control and it does appear that there is a concerted effort to produce a comprehensive deal, I’m quite optimistic on the prospects for European infrastructure investors in 2012 for a number of reasons. 

At a macro-level with European government debt at record levels, there will be an ever greater reliance on private finance to fund infrastructure. Current levels of European government indebtedness will also drive infrastructure privatisation programmes of assets, such as airports and ports. 2012 should therefore be a year of opportunity for investors to acquire hitherto unavailable assets. 

However, I don’t see the asset return profile divide changing. Assets in Southern Europe will continue to have greater levels of risk and returns attached to them, while infrastructure assets in Northern Europe will remain safer for investors. 

From a financing perspective, I believe that infrastructure debt funds will continue to grow in 2012, particularly as new European Union regulations are forcing banks to turn away from infrastructure debt: this will be positive for investors looking for new debt for investments in 2012.

Although I don’t think 2012 will see a new wave of direct pension fund investments, I do expect to see renewed interest from pension funds looking for access to the sector via existing infrastructure fund managers.  

In summary, 2012 should be a year of excellent opportunity for infrastructure investors.

Paul Kraske, partner, energy and infrastructure projects, Skadden

Paul Kraske

2011 was a strong year for the domestic energy sector. Spurred by, among other things, advances in technology, falling materials prices and Department of Energy (DoE) loan guarantees, sponsors, lenders and equity investors collaborated on first-of-their-kind energy projects of historic size and scope. 2012 promises to be another active year for domestic energy development, finance and acquisitions – but the extent of activity will vary significantly across different industry segments. 

As photovoltaic (PV) panel prices continue to fall and solar approaches grid parity (some would argue grid parity has already been achieved) we can continue to expect significant solar activity in 2012. We should also expect to see increasing consolidation in a solar industry that, at times over the last four years, has looked something like the Wild West. At the same time, most prognosticators are more pessimistic about prospects for wind development in 2012. The relative absence of tax equity, sunset of the treasury tax grant program and uncertain future of the existing production tax credit are all having a chilling effect on wind development. 

Increasing development of natural gas generation is inevitable – given widespread consensus that cheap, abundant natural gas will continue to be available in the US for years to come. But the widespread development of nuclear power is still unlikely following the failure of the DOE’s nuclear loan guarantee programme and the Fukushima nuclear disaster in Japan. 

Finally, look for increased activity in transmission development during 2012. Most agree that Texas’ bold effort to stimulate the development of transmission in Competitive Renewable Energy Zones (CREZ) was spectacularly successful (2011 saw literally dozens of lenders competing to finance several CREZ transmission projects in Texas being developed by different utility and independent sponsors).

In 2012 California will follow the Texas CREZ model by identifying necessary transmission projects in California and allowing utilities and independent developers to compete for the rights to develop those projects.

Tony Mallin, partner and chief executive, STAR Capital Partners

Tony Mallin

I think the main issue for infrastructure investors for the coming year is refinancing for those who are building infrastructure and have yet to term out the associated debt after completion. With the balance sheet shrinkage that is on the way in the banking world, term refinancing is either prohibitively expensive or non-existent.

The infrastructure investors who do not need debt to acquire assets and just invest for yield and capital appreciation will have a distinct advantage over those who need debt to make their financial models and returns work. I think 2012 will be the year of the long-term equity yield investor.