The typical infrastructure developer in 2009 must have felt a bit like a Hollywood star fallen from grace. The actor, once feted by agents, now finds that those same agents won’t even pick up the phone. To apply this to infrastructure, all you had to do was replace ‘agent’ with ‘commercial bank’.
Living in a world
“I recognise that in the middle of 2007, when banks had liquidity to spare, margins were too low – and that’s precisely one of the reasons why things went wrong. But margins today are too high in relation to the risk profile of the projects they are financing,” complains Roland Jureka, the head of Strabag’s concessions unit, in this month’s issue of Infrastructure Investor (see p.22).
In short, 2009 was the year concessionaires had to learn how to live in a world with less bank debt, not an easy feat for an industry used to closing its projects with debt ratios of between 80 percent and 90 percent. This triggered fundamental changes in their investment strategies.
Abertis, which in late 2008 had been ready to write a $12.8 billion cheque to fund the privatisation of the Pennsylvania Turnpike, said early last year that it would stay away from large investments in a bid to keep its credit rating from deteriorating. Portuguese developer Brisa, meanwhile, revised its stated goal of deriving about half of its business from abroad in five years’ time and dropped out of several international tenders.
Refinancing risk rose exponentially, with many dreading what sort of conditions they would be able to obtain. Existing bank facilities were rolled over in exchange for higher margins but, more often than not, concessionaires tapped the capital markets and used private placements to obtain a better price.
For new projects, the absence of true long-term financing introduced the punishing cash-sweep mechanism, forcing concessionaires to either refinance their loans in six to eight years’ time, or channel all of their extra cash to pay off debt, to the detriment of their shareholders.
Case Study: Poland’s A1 highway: a bumpy road
After a year of negotiations, Cintra, now fully-owned by Ferrovial, and the Polish government rescinded the PPP contract for a €2.1 billion stretch of Poland’s A1. Both parties had signed the concession contract for the road in January 22, 2009, setting a one-year deadline to reach financial close.
During that year, they would try to agree on the road’s economic parameters in light of the financial crisis’ impact on the cost of capital, capex and traffic projections included in the original bid.
But the project’s demand risk started to give commercial banks cold feet and they indicated to Cintra that their willingness to take on traffic risk would come at a high cost. High funding costs, in turn, compromised the project’s internal rate of return unless Cintra found a way to mitigate them.
Cintra managed to get the EIB and the EBRD to fund half the project and was willing to pay for 20 percent of the road from its own funds. But margins on the remaining commercial debt portion were still too high to make the deal attractive for the company.
In the end, local sources say Cintra tried to convince the government to increase tolls for the road, a change it was not willing to accept, preferring to build the A1 out of the state budget.