Like serious injury or illness, a credit crunch happens suddenly and then requires a long period of convalescence. In the infrastructure financing market, the patient isn’t yet on the verge of leaping out of bed but the vital signs are encouraging nonetheless.
While 30 year-tenors had attracted plenty of support during the pre-crunch boom years, there had been little evidence in the wake of market meltdown for appetite going beyond five- to seven-year tenors. Southmead indicated otherwise.
This gradual return of confidence has continued thoughout the year, and for good reason. In the aftermath of the credit crunch, the drying up of the inter-bank lending market led to real fears whether certain banks would be able to fund themselves. Inter-bank lending has still not recovered to pre-crunch levels. But liquidity fears seem to be gradually easing.
A revitalised high yield bond market has had a positive effect on the bank market. That’s because if lenders are able to feel confident they can execute successful refinancings in the bond market, they are more likely to be comfortable with the credit risk they are taking on in the first place.
However, it is worth reminding ourselves of the limits of the high yield market. While it flourishes today, it may not neccesarily be so accommodating to the wave of infrastructure-related debt due for refinancing over in the next few years. Even a flourishing high-yield market might struggle to absorb the much-hyped “wall of refinancing” in anywhere near its entirety.
It’s also worth considering that European banks have been at the forefront of infrastructure lending and some have built up huge loan books as a result. Many are unwilling to take what may be the only pragmatic option by churning those books at a loss. But until capital is released, they will have limited capacity to lend to new deals.
Perhaps as a result of this, the number of active banks is at a low. In the PFI market, a pre-crunch peak of around 30 or so core lenders had shrunk to about 10 by the turn of this year. There are signs of some banks which had exited the market now returning (and those that stayed committed to the market now lending more). But this is, as everything else, a gradual process.
Nor is the PFI market limited solely by the number of willing lenders. It’s restricted more fundamentally by deal flow – or lack of it. The UK’s “Building Schools for the Future” school rebuilding scheme was one of the victims of the UK government’s budget cutbacks. There may be more cuts to come.
For now, there is sense that the financing environment for PFI projects and infrastructure deals generally is getting a little better. But it’s far too early to pronounce it fit and well.
*The November 2010 issue of Infrastructure Investor will include a cover story on financing