Looking under the bonnet

In keeping with the spirit of the times, infrastructure bond investors want more information.

Back in the heady pre-Global Financial Crisis (GFC) days of project finance, wrapped bonds issued by monoline insurers were the order of the day. The underlying credit didn’t appear to matter to those institutions snaffling the product. It was very familiar, it was homogenous and it came with a triple-A rating. What not to like?

The answer to this question became apparent whenever these projects ran into trouble and investors found that they couldn’t get any information on what was happening now – and what would be happening next. Seeing themselves as providers of product rather than relationship nurturers, there is a view (albeit with the benefit of hindsight – and not necessarily true in all cases) that monolines were less than responsive to investor calls for dialogue.

Ultimately, many investors ended up wishing they could have got a closer look – not just at underlying credits but also at the mortgage-backed security exposures that the monolines were building up. In the face of the GFC, these exposures almost destroyed the monoline industry. As one infrastructure advisory professional sagely told us: “It turned out you were buying an insurance policy that was only as good as the insurer.”

Since the monoline collapse, the project finance industry has been waiting and hoping for a replacement. One of those firms hoping to fit the bill is FHW Capital, which this week was able to claim that its first deal was also another kind of first. To borrow the words of a press release: “The first unwrapped two tranche listed bond structure for a new PFI project”.

As the description makes clear, FHW – comprised of three senior executives who were part of Hadrian’s Wall Capital’s ultimately ill-fated infrastructure debt fundraising effort – does not provide investors with the comfort of a wrap. But it does offer to provide them with a voice, an arm around the shoulder (if needed), and as much information as they wish to feast their eyes on. It offers them, in short, a relationship.

Alastair Watson, one of the three founders, explained the rationale to Infrastructure Investor thus: “We’re there for those who are attracted to credit enhancement [though he points out that FHW will go the unenhanced route as well], but are wary since the monolines. They want someone reporting back to them and looking after their interests. And if, for example, an important decision is needed on a waiver, they want to be involved.”

The FHW service offering comprises due diligence, document negotiation and monitoring and reporting services. On its “first” deal – the Salford City Council social housing PFI in Greater Manchester – FHW is managing agent for the life of the 29-year bonds. “We’re one point of contact for the lenders – and, for the investors, we’re a point of contact for the deal,” says Watson. “What we’re not is an insurance policy”.

By offering to keep investors in the loop at all times, FHW appears to be aligned with increasingly loud calls from investors of all types and stripes for greater transparency, more information and an all-round better relationship with the custodians of their money.

The end of the monolines, though? Hold your horses. Assured Guaranty, a surviving monoline with a history dating back to 1988, in July completed two wrapped bond issuances supporting UK PFI deals and claimed to have further deals in the pipeline. For some investors, comfort still comes wrapped.