Building Hadrian’s Wall

There has been so much talk about Hadrian’s Wall over the last year-and-a-half that it can be hard to believe the fund has yet to officially launch.

But there is good reason for that interest. Hadrian’s Wall is one of the first propositions in the market with a strategy based on how to get the capital markets back into infrastructure financing. While bonds were once a staple element of infrastructure finance, their viability as a funding tool was wiped out almost overnight when the financial crisis led to the collapse of the monolines, the traditional insurers of infrastructure bonds.

Marc Bajer

That left banks as the sole debt providers for infrastructure at a time when their liquidity was severely constrained. It also created a vacuum that has yet to be filled. And that’s something Bajer, as the former head of Assured Guaranty’s European business – one of the only monolines not to go bust in the aftermath of the Crisis – is acutely aware of:

“At Assured Guaranty, we made some pretty good decisions on what assets to insure but that didn’t change the fact that investors had lost confidence in the monoline industry,” he says. “Immediately after that happened I started thinking, around March 2008, on how to reinvigorate the [bond] market by providing credit enhancement in a different way and yet still offer all the services we provided as a monoline,” Bajer explains. Out of that ambition, Hadrian’s Wall was born.

Enhancing ratings

The fund’s proposition is straightforward: to facilitate senior debt funding for infrastructure projects in the capital markets by providing subordinated debt positions within senior-ranking infrastructure bonds. The objective is to enhance the underlying ratings of infrastructure bonds. It is raising a fund to invest in projects across the UK and Europe, which is denominated in both pounds and euros – with the aim being to raise £500 million and €500 million (though the split between the two currencies may be adjusted).  

“If you want to reopen the bond market the [bonds’] rating has to be at a level where it is suitable for investors. Most will not have a lot of money to invest in BBB- bonds but they will have much more money to invest in A rated bonds, whose underlying assets are actively managed by the fund,” Bajer says.

That’s why Hadrian’s Wall chose to provide subordinated debt. “What happens is we are taking the risk at the bottom of the senior debt so if there is a loss – and I must stress we will never expect there to be  a loss – we get hit first and that protects the senior note holders, reducing their risk and therefore increasing the rating for the bonds,” Bajer explains.

Subordinated debt is riskier and, as such, traditionally more expensive than senior debt. How does Hadrian’s Wall plan to price its offer competitively against bank debt? “Well, it’s a blend really. The way it works is Hadrian’s Wall provides the junior debt parts and the capital markets provide the senior debt parts and when we blend the two, we are able to provide a very competitive cost of financing vis a vis senior bank debt,” he argues.

Competitive position

But just how competitive can Hadrian’s Wall be nowadays? One prominent banker at a well known institution suggests the idea of debt funds made more sense six months ago than it does now, when the bank market is on its way to recovery.

Bajer smiles at this suggestion. “If anything, our competitive position has been improving over the last six months versus the banks,” he says.

How so? “Well, one of the most important things that borrowers really need is [loan] duration. They want much longer loans than the banks are currently offering and we are expecting to be able to provide 30- to 35-year financing. Secondly, our pricing relative to the banks today is very competitive. And thirdly, we are also providing financing for the construction period,” he adds.

“My view is that if you compare a bank deal with a bond market deal – and our deal would be the same price as a bank deal – we would still have advantages over it because of the longer loan tenor,” Bajer argues. “In addition, our fund is bringing an incredibly deep market of long duration buyers back into play,” he adds.

However, he is quick to downplay the prevalence of any one solution. “We are not trying to solve every problem in the market; we are trying to add a tool that can be used to finance infrastructure across Europe. It’s not the only tool but one thing is certain: you can’t have only one source of financing,” he stresses.

Lower risk profile

What Hadrian’s Wall unarguably is, though, is a new tool – so how are investors reacting to this novel proposition? “Extremely well,” Bajer answers. “In fact, our return profile is similar to the return profile at the lower end of a comparable equity fund with the fundamental difference that our risk profile is lower because we do a subordinated portion of the senior debt.”

One investor that responded well to the proposition was Aviva Investors, the asset management arm of insurer Aviva. So much so, in fact, that it decided to team up with Hadrian’s Wall Capital and help run the fund. Aviva Investors will be the new vehicle’s fund manager while Hadrian’s Wall Capital will provide investment advice to Aviva. In addition, Bajer expects Aviva Investors to make a seed commitment to the fund when it reaches its planned €200 million first close this summer.

But the other main reason why he believes the market has been reacting well to Hadrian’s Wall concerns the second part of its business plan. This includes providing investors with transaction execution, deal monitoring, reporting on deal performance and providing a communication and voting platform for senior note holders to vote on aspects of a transaction and its performance, Bajer explains.

Those functions, he argues, are what the market wants. “We did not develop this fund in a vacuum – we developed it based on what market participants told us they wanted. As a result, we structured the fund in a way we believe appeals to all the different constituencies that have an interest in us being successful. This is a fund that has really been designed by all our clients,” he says.

It also shows that, while the monoline industry has disappeared, investors still crave many of the services it used to offer – and that’s where Bajer’s background comes in handy. “On many levels, we are providing the same services,” he points out. “We have a lot of experience in dealing with credit underwriting and risk assessment. The way we evaluate those kinds of risk and take those kinds of risk is very similar to what we did at Assured Guaranty,” Bajer says.

And that’s not going to change for a good reason, he argues: “The monolines have suffered terribly with this crisis but that pain has not been brought on from their insuring infrastructure risk – it’s been brought on by their insuring structured credit risk. The monolines actually have a very long and positive history of insuring infrastructure risk.”

The fundamental difference between the two is that “the monolines provided insurance whereas Hadrian’s Wall is providing a risk-taking piece. We are providing cash, which is what we think investors want in this market,” Bajer says.

What’s in a name

The other thing investors might want to know about Hadrian’s Wall is why exactly Bajer decided to name his new vehicle and advisory business after a 117-kilometre fortification built along the width of northern England by the Roman emperor Hadrian. Is he perhaps seeking to keep certain investors from joining the fund?

“For clarity’s sake, there is nothing in the fund’s criteria restricting it from investing north of Hadrian’s Wall,” Bajer answers, laughing. “No, I was actually having dinner with my wife two years ago and I was telling her that the fund’s name had to be something associated with infrastructure, something that carried some gravitas,” he recounts.

“So my wife suggested I pick a Greek or Roman name and I said: actually, Hadrian was a big infrastructure player back in his day. In fact, he was probably the biggest developer and financier of infrastructure that Europe had ever known before or since. And then my wife suggested Hadrian’s Wall, which is still standing after 2,000 years, and that’s how I decided on the name,” he says, adding:

“I believe it illustrates the principle under which we are trying to operate: bringing long-term and durable solutions back to the market that will ensure financial certainty for all our counterparties and allow our investors to make a good return.”