This article is sponsored by Kommunalkredit
Kommunalkredit is a dedicated infrastructure and energy bank. That is an unusual model. How did it come about?
The bank was privatised in 2015 after a period of state ownership in the wake of the financial crisis. In many respects, it was a blank piece of paper. With experience of over 30 years in the sector, I strongly believe that infrastructure is a critical tool for meeting the needs of society. So, we decided to do something a little bit different.
Banks are usually set up to sell myriad products. Cross-selling is the buzzword in the banking community. But how can you really expect to be experts at everything? After a decade of effectively not writing any new business, we needed to demonstrate a clear area of strength – we needed to show we were bringing something new to the table. And so, we created a whole platform solution around our core competence – infrastructure and energy – while never losing sight of public finance.
So, what exactly have you done with that blank sheet of paper?
First, I have brought together a team of young, eager, talented people with the aspiration to drive change and to contribute to society.
We have also adjusted the initial privatisation remit. The assumption was that we would focus on Austria and perhaps Germany, and that we would focus on public-private partnerships. But, as a team, we were convinced that focus was too narrow. We see Europe as the community we live in and we now have a Europe-wide strategy. With PPPs, meanwhile, it is typically the public side that is developing an idea and the private side that is responding. We want to contribute proactively, not just react.
What type of deals are you pursuing?
One of our differentiators is our intellectual openness and agility. In any typical deal, there will be some sense of urgency. That could be driven by conviction in a new idea. Today, for example, that might be hydrogen. Or it might be the cyber infrastructure required to facilitate blockchain. A year ago, it may have been battery charging or, two years ago, broadband rollout in urban areas.
It is important to us to be able to move fluidly between these emerging investment themes, which is why it doesn’t make sense for us to be structured around product pillars, or sectors, or even geographies. If anything, we embrace a start-up ethos more than that of the traditional banking world. There is a luxury to being small and fleet of foot, while at the same time having that regulated banking framework to give external investors the confidence they need to place their money with us.
How has covid-19 impacted the nature of infrastructure dealflow?
I would say that there has been a paradigm shift. In 2019, a large part of the infrastructure industry was focused on the transportation and conventional power production industries – not coal, perhaps, but the natural gas required to stabilise a grid dominated by intermittent renewables. But covid-19 and the severe lockdowns that followed turned human interactions on their head. Government deficits have soared, and so infrastructure priorities have changed.
Again, being small and agile, we have been able to respond rapidly to that new reality. Over 90 percent of our investment last year was either focused on digitalisation or renewables. We also increased our lending by 11 percent regardless of the global pandemic.
What specific deals are you most proud of over that period?
I am going to deliberately start with a deal that we did in Italy, because that may seem counterintuitive for an Austrian infrastructure bank, especially when Italy has been so widely criticised for its public deficit. But it very much reflects our European perspective.
“Even two years ago, there was still some scepticism about the urgency of combatting climate change”
Viveracqua involved the financing of six water utilities using asset-backed notes – the Viveracqua Hydrobond 2020. In addition to the proceeds of the Hydrobond issuance, the investments will be supported by public grants, special support granted under the regulatory regime and operating cashflows generated by the utilities. What makes this project unusual is that it is a credit-enhanced securitisation, structured in an SPV governed by Italian securitisation law and backed by a number of assets. But unlike a ‘normal’ securitisation, the assets are not a diversified pool. The underlying bonds are long-dated and pay a fixed rate.
We are now taking what we have done in Italy and holding discussions about employing the model to support Austrian infrastructure that may have been hit by the loss of taxes associated with a lack of tourism. There is a real advantage to us being able to bring ideas we have worked on in other jurisdictions back home.
Another example I would cite would be TrIIIple. Unlike Viveracqua, which involved an investment of over €250 million, this investment was relatively small-scale. Again, our size and model mean that we have the flexibility to operate equally well at both ends of the size spectrum. Here, we financed the heating and cooling plant for five skyscrapers in Vienna, located on the shores of the Danube. The water is extracted from the canal and five groundwater wells and then used to heat and cool the buildings. The plant uses the river water as a heat source or heat sink and is the building’s sole source of energy. The electrical energy is used to operate heat exchangers suitable for industrial use. Another special feature is that the plant can be operated in dual-use mode, which allows the apartments to be heated and the office and retail spaces to be air-conditioned at the same time.
And then I would also point to Green Genius. This involved the refinancing of a Lithuanian biogas portfolio, consisting of 11 biogas plants with a total capacity of around 11MW. The bank structured and arranged the transaction, with 50 percent of the senior term loan being underwritten by our Fidelio KA Infrastructure Debt Fund. This transaction is not only the first cooperation with Green Genius, but also our first transaction in the Lithuanian energy market.
You mention your debt fund there. How have your institutional offerings evolved?
A lot of the institutions we have been syndicating to in the deals we have backed were the same pension managers and insurance companies that were already starting to show an interest in what we were doing. And so, back in 2018, we set about raising a €150 million fund. That fund closed at over €350 million last year. We feel there is a real momentum at the moment and so we fully expect to launch a second senior debt fund and potentially a high-yield fund in 2021.
What has your own approach been to ESG?
Sustainability is an integral component of our business model. In fact, we were the first financial services provider in Europe to establish an EMAS environmental management scheme, right back in 1997, when these things had scarcely been heard of. It is in our DNA. We have published a certified sustainability report since 2012. We were the first Austrian issuer of a social covered bond in 2017 and the first Austrian financial institution to become a member of the European Clean Hydrogen Alliance.
“Covid-19 has demonstrated just how drastically important infrastructure is”
ESG is embedded in all our decision-making processes and integrated into our corporate culture. These things have been important to us for a very long time, but covid-19 has only intensified that focus. Future generations will hold us accountable for the measures we are taking now.
What do you think the future holds for infrastructure and what are your own plans within it?
Covid-19 has demonstrated just how drastically important infrastructure is, not only for our lives today, but for those who will come after us. Sustainability is critical and we will need political and economic measures to support that on a national and global level. We already have ambitious goals in the Green Deal, the Paris Agreement and Austria’s own #mission2030. But innovation will prove vital to pushing the boundaries of renewables, whether that is wind, water, sun or biomass. We need to keep developing new ways forward, such as hydrogen, and we are excited to be part of that innovation and that drive towards a sustainable future.
What do you think the legacy of covid-19 will be for the infrastructure industry?
I think there is no doubt that covid-19 has made people more conscious about the way that they behave and the way they interact with others, at a local, regional, national and international level. We have all seen the way the Trump administration behaved in the US and the visceral reaction that garnered in Europe, in particular. And I think that, as part of that, people are recognising that cheap is not always best.
We need to bring critical production, such as pharmaceuticals and chemicals, back to our own shores, and we need to ensure that production is done in a sustainable way that reflects our societal values. The same is true of energy. A secure and steady supply is vital. Even two years ago, there was still some scepticism about the urgency of combatting climate change. I think, with covid-19, that scepticism has finally gone away. There is an understanding that environmental and social concerns are paramount.
I also think that covid-19 has highlighted the importance of social infrastructure, particularly care homes and hospitals, as well as the importance of powerful communications infrastructure. Home schooling and remote working have shone a spotlight on the role that data centres play, as well as fibre connectivity. At the same time, of course, these are highly energy-intensive assets that encourage owners to invest in energy-efficient measures, which brings us back to clean energy sources.