Investors can expect to see smaller infrastructure deals in the current market environment but should not count out the possibility of big, multi-billion dollar deals, according to a senior banker at Royal Bank of Scotland, one of the world’s most prominent lenders for infrastructure.
“I think you’re going to see more of the smaller deals prevail in the market and it is partially, not entirely, because of the fact that the quantum of debt that’s available is a lot less now than it was six months or a year ago,” Dana Levenson, head of North American infrastructure banking at RBS, told delegates gathered at the New York State Infrastructure Summit.
Levenson agreed with other conference speakers who defined the cap on size of “smaller deals” as $1.5 billion. “I think that’s about right, the north side of that,” he said.
I want to make a caveat, though: big deals still can get done
But he did not rule out the possibility of larger transactions.
“I want to make a caveat, though: big deals still can get done,” he said, referring to leases of brownfield, or existing assets owned by the public sector.
“It would be a shame if the lease experience with the Pennsylvania Turnpike and Midway Airport are enough to dissuade the lessor from moving ahead with a large transaction,” he added. Both of those transactions, $12.8 billion and $2.5 billion in size, respectively, have failed to reach financial close.
The key is to look for transactions that enhance value “not only to the lessee, but the lessor”, Levenson said. In doing so, he advised investors to reach for other levers of value than just the money the owners of the assets can raise for leasing them.
“The previous owner is going to measure [value] not only by the amount of money that gets paid to them but by the assurances that they can have that the asset will continue to be run well and, in fact, may be run a lot better,” Levenson said.
He named Global Infrastructure Partners (GIP), a $5.64 billion infrastructure fund headed by Adebayo Ogunlesi, as an example of a sponsor who is able to carry out this strategy successfully. He praised their efficient management of London City Airport, in which GIP has a 75 percent stake.
He said banks are increasingly looking for efficient asset management as a determinant in their lending decision. So following GIP’s example may help sponsors raise debt.
“What’s happening is each credit is being assessed against the ability of the sponsor to manage [the
Right now, debt is more scarce than equity. 'Will it stay that way?' seems to be the more important question and I think the answer is 'no'
asset] in an accretive way,” Levenson said.
But while credit remains a constraint in financing transactions, equity may also someday become a concern.
“Right now, debt is more scarce than equity. ‘Will it stay that way?’ seems to be the more important question and I think the answer’s ‘no’, but I don’t know in which direction it’s going to move,” Levenson said.
“I’m hopeful that debt will be more plentiful than equity because that makes the metrics of these deals work for the investors,” he added.
Prior to joining RBS, Levenson served as the chief financial officer of the City of Chicago. In that position, he was responsible for the long-term leases of both the Chicago Skyway for $1.83 billion in 2005 and the Chicago Downtown Parking System in 2006 for $563 million.