In case you have been wondering (which you probably haven’t): infrastructure lending has not escaped the global market turmoil of the past 18 months. Global project finance lending for the first nine months of 2009 was around $180 billion, down from over $260 billion for the corresponding period in 2008, according to financial data provider Dealogic – a drop of 31 percent. The fall was largely due to a constriction of liquidity in the infrastructure finance market, agree the project financiers Infrastructure Investor spoke to.
One factor behind this trend is the fact that the universe of active infrastructure lenders has shrunk. Several banking sources said that throughout 2007 and early 2008, project sponsors could look to a group of over 40 banks worldwide active in infrastructure to finance their deals. Now sources say there are less than 20, either because banks have withdrawn for strategic reasons, or because they have gone out of business. Those banks that are still active in infrastructure are facing tighter credit controls, which is limiting the availability of financing further.
Another constraint is that some lenders have retrenched to their domestic markets – in all the areas they do business in, including infrastructure. “Most banks have made commitments to their governments to primarily look after their own territories,” says Adrian Olsen, Bank of Ireland’s head of global project finance.
Matthew Vickerstaff, the New York-based global head of infrastructure and asset-based finance at Société Générale, says that as a result of this retrenchment, he has seen less competition for infrastructure lending, which means spreads have improved. “On the downside, there’s less deal flow around, because of the lack of liquidity in the bank market.”
A TRUER COST OF CAPITAL
With liquidity down, the syndication market for infrastructure loans is suffering as well – to the extent where it is now virtually non-existent. A number of banking sources described the infrastructure syndication market as “dead”, although some believe it could pick up next year. “I think we will see that happening in 2010,” says Vickerstaff, citing interest in the recent $903 million Port of Miami Tunnel project as an indication that banks may soon be willing to selectively start underwriting deals.
Further proof that despite the fall in lending volume, there is still debt available for quality projects, came in October in the UK, when Global Infrastructure Partners revealed a syndicate of 12 lenders helping to arrange a financing package in excess of £1 billion to help finance the firm’s £1.5 billion acquisition of Gatwick Airport. The Gatwick consortium comprises Banco Santander, Bayerische Landesbank, Calyon, Credit Suisse, Espirito Santo Investment, HSBC, JP Morgan, Royal Bank of Canada, The Royal Bank of Scotland, Société Générale, Sumitomo Mitsui Banking Corporation Europe and WestLB.
“There is sufficient liquidity for well-structured transactions,” says Gershon Cohen, head of project finance at Lloyds Banking Group. Debt funding is available, he says, but borrowers must accept that the current cost of funds represents a truer cost of capital and long-term funding.
This premium is reflected in the margins borrowers pay for debt, or the fees which lenders add on to the base rate to reflect what they judge the inherent risks of a project to be.
Margins on infrastructure loans, according to market insiders, peaked between April and June this year when borrowers could expect to pay between 350-400 basis points above LIBOR to secure debt for any infrastructure projects with a value over a couple of hundred million dollars. In the UK, for instance, Balfour Beatty and Skanska paid a top margin of 350 basis points over LIBOR for a £950 million debt package from a 17-strong bank group backing its £6.2 billion, 30-year project to widen an maintain part of the M25 motorway around London in May.
Since then, European bankers have seen margins come down, now ranging from 250 basis points for “plain vanilla” deals – simple projects with a small amount of debt, up to the 275-300 points for larger loans and more technically complex projects like waste-to-energy plants. While not in the pre-crunch range of 100-200 basis points, this level is nevertheless a big step down from the high earlier this year.
This is even more so the case in the US, where credit spreads peaked even higher this year and have fallen even lower since then. “You had a situation almost a year ago in January where BBB credits were unfinanceable in the market,” recalls Dana Levenson, the head of North American infrastructure banking at Royal Bank of Scotland (RBS). “And then, when they were eventually able to be financed a couple months later, they were around 750 [basis points] or 800, often 1,000 off in terms of the credit spread on a fixed-rate basis to treasuries. Now they’re back down to 150.”
A cause for optimism? Perhaps. Levenson says he is seeing “a significant comfort level returning to the fixed income market for virtually all classes of debt, including corporate, private placement, bank and project”.
One infrastructure banker says he believes margins on term loan project finance deals will remain around the 200 basis points mark for at least the next five years, adding that they may never drop below this after recent experience has given bankers a “pricing floor beneath which they will not go”.
JOINING THE CLUB
In addition to the impact on margins, another side effect of the general shortage of liquidity in infrastructure lending has been the increasing use of club deals, where a number of banks jointly lead negotiations with the borrower. This was the case in both Florida’s $1.68 billion I-595 project, in which a club of 12 banks stepped up to provide $780 million in senior loans, and the Port of Miami Tunnel, which featured a club of 10 banks providing $341 million in loans – among them Société Générale and RBS.
While some see the structure as necessary in the current climate, others are less keen on the concept. “Large club deals are not the ideal structure for infrastructure deals,” says Cohen, who argues they can lead to there being too many players at the top table making it a more complicated forum for project sponsors to manage.
Olsen on the other hand says the structure can work for smaller deals, but adds that once the club becomes larger than four or five participants, the process can, for all concerned, become unwieldy and difficult to manage. Something akin to “too many cooks spoiling the broth”, he says.
It’s fair to say, though, that many of the club deals closed this year would not have happened had it not been for the help of governments to get banks to sign on the dotted line. Small wonder, then, that public sector institutions like the European Investment Bank (EIB) and the UK government’s recently established Treasury Infrastructure Finance Unit (TIFU) have proved useful sources of finance, often providing debt to top-up the financing on larger projects where the banks have fallen short.
For example, banks backing the Greater Manchester Waste PFI project, a £640 million (€703 million; $1 billion) 25-year waste management PPP scheme, had been struggling for months to agree on the terms of the deal. In April lead arranger Bank of Ireland and three other banks finally signed off the debt for the deal, but only after the EIB had committed £182 million of debt, with TIFU stumping up a further £120 million.
In the M25 project, 16 banks could only lend a combined £950 million. The EIB subsequently came up with £400 million of debt to bridge the project’s liquidity gap, although TIFU was not called upon in this instance.
These are just two of examples of stepped-up lending by such organisations. Throughout the credit crisis, the EIB has become one of Europe’s biggest backers of PPP projects, with a portfolio of 120 investments totalling about €25 billion, according to a spokesperson. Needless to say private sector practitioners think the EIB and TIFU “play a key role in the process, as they give comfort that there will be requisite and timely funding,” according to Paul Davies, a partner at PwC in London and a former banker specialising in infrastructure transactions
In the US, the picture is virtually identical, with the credit crisis keeping the American equivalent of the EIB and TIFU – the Department of Transportation’s TIFIA credit programme – busier than ever. TIFIA, which was authorised by the 1998 Transportation Infrastructure Finance and Innovation Act, has been involved on practically every large transportation deal closed in the US this year. The agency provided $341 million in low-cost loans to the Port of Miami Tunnel, and $603 million toward the I-595 corridor improvement project. People involved in both deals have told Infrastructure Investor that the transactions would not have happened had TIFIA not been at the table.
Yet another reminder of its pivotal role came in September, when the agency passed another landmark: an $800 million loan toward the $2.7 billion Cintra- and Meridiam-backed New LBJ road expansion in Texas – the second-largest loan made by TIFIA to date.
Funding constraints also exist in the bond markets. Following the rating downgrades of monoline insurers Ambac and MBIA in early 2008, the bond financing route for infrastructure projects has effectively been closed.
One bond financing tool that has been talked about for several months in the industry is the idea of a “bridge-to-bonds” financing structure, where banks provide loans to a project with the goal of refinancing via a bond offering some 18 months later. “It’s like the holy grail of the infrastructure banking market,” quips Levenson – who does think there is a realistic prospect for this kind of instrument: “There will be a bridge-to-bond deal or deals that take place – I have full confidence in that.” The big question, he says, is “what’s the asset? [It] has to be absolutely perfect for the bond market”.
In other words, assets to have the right credit quality, sufficient size and a robust business model to be able to support the structure. They also need to be able to attract the attention of corporate bond investors not accustomed to buying infrastructure bonds. “That’s not going to be the easiest thing to find,” Levenson says. He believes Midway Airport, due to its size and $1.3 billion of existing fixed income debt, would have fit the bill. Despite the challenges, though, Levenson remains confident: “[Bridge-to-bonds] will take place.”.
IS THE CORNER BEING TURNED?
In the meantime, those focused on the traditional project finance market will concede that despite the overall reduction in lending volumes, things may not be as bleak as they seem. Putting the Dealogic figures cited above into context is a useful starting point: the $262 billion of lending for the first nine months of 2008 was an all time high. When compared to 2007’s figure, this year’s lending was just 12 percent lower.
“Conditions are slowly starting to ease, with several banks returning to the market, and others who remained having more funds available to them,” says Bank of Ireland’s Olsen, though he also thinks the market is fragile and another “sharp frost” could seriously damage the progress already made in thawing the market.
Others think the corner is being turned. Granted, for the time being, “sponsors and clients, in terms of granting authorities, have less confidence that deals are going to go ahead,” says Société Générale’s Vickerstaff. But he also notes: “We’ve reached a kind of tipping point where there is sufficient confidence building up for that to change and actually I think that as we go into next year we’ll see far more confidence returning”. It’s the kind of prediction everyone wants to see come true. As far as investment professionals are concerned, the crisis-induced lending dearth has been going on for long enough.