Bankers see difficult times ahead

An upcoming wave of refinancing will spur ‘difficult discussions’ with borrowers who over-leveraged their portfolio companies. But now may be a good time to take advantage of the bond market which is approaching pre-crisis pricing levels, according to a panel of bankers speaking at the Infrastructure Investor: Europe 2010 forum in Berlin.

Investors hoping to get their deals financed should take advantage of relatively favorable bond market conditions now before things get worse, as a wave of refinancing in the next few years is likely to make debt financing more difficult to secure.

This was the warning from panel of senior bankers speaking at the Infrastructure Investor: Europe 2010 forum in Berlin today.

James Miller, head of secured debt markets at RBS said the bond market is “the right home” for a lot of infrastructure deals in the market at the moment. But project sponsors may want to add quickly to take advantage of a window of opportunity before market conditions worsen.

“The real test in my mind is there is a lot of refinancing coming up,” Miller said, referring to companies that will need to retire their debt and take out new loans in the next one to two years. Relative to the wave of refinancing, “right now is an easy time to get deals done,” he added.

The audience of more than 200 conference delegates agreed, with 57 percent saying in a poll conducted during the session that institutional investor appetite for bonds will increase.

This growing appetite is being reflected in the prices. Spence Clunie, senior managing director at Macquarie Capital Advisers in London, said that pricing in the bond market is cheaper than the bank market right now and may even be approaching pre-crisis levels.

For example, in August 2007, when Clunie’s team issued bonds for Thames Water, a Macquarie-owned water utility in London, they priced at a spread of between 70 to 80 basis points, he recalled. This month, when Macquarie issued bonds for Wales & West, a gas utility, they priced at a spread of 130 basis points, Clunie said.

Still, the after-effects of the financial crisis will continue to be felt in the debt market as over-leveraged companies will struggle to secure bank financing, Chris O’Gorman, the head of infrastructure at Mizuho Corporate Bank

“The banks are just going to insist on that leverage coming down. They’re going to insist on new equity coming in from the same source, which is going to be at below-market levels, and they’re not going to give any return on that new equity investment for probably five years minimum until that leverage has come down,” he said.

“I think there are some very difficult discussions ahead,” he added, citing the need for bond market deals and other options for refinancing.

Speaking from the audience, Peter Luchetti, a partner at San Franciso-based infrastructure fund manager Table Rock Capital, presented the panel with a non-traditional financing option. He said his firm is presenting project sponsors with the idea of issuing Build America Bonds, a taxable municipal bond with a government subsidy for interest payments, as one way to finance their projects.

The bonds would be issued through a conduit issuer, the California State Association of Cities and Counties, Luchetti said.