Innovate or die

If innovation is the key to success for lenders in today’s infrastructure financing market – and Deutsche Bank’s Bernd Fislage believes that it is – then you might want to consider the example of an Italian solar park transaction as a useful illustration of current and future trends.

In the spring of this year, Deutsche Bank was approached by one of its developer clients which had a solar photovoltaic (PV) project in Canaro, a municipality in the Veneto region of north-east Italy, which was ready to build. The client needed to start work immediately in order to establish grid connection by the end of August to benefit from the relevant feed-in tariff mechanism applied to projects connected by that date.

And that’s where the need to innovate came in. A typical long-term project financing with a few other banks in a club deal would have taken too much time. Within three weeks, Deutsche Bank arranged an €83 million six-month construction bridge to a project finance take-out, having got credit approval to act as sole construction bridge lender. Deutsche Bank is currently arranging the long-term project financing for the park, which was successfully built and grid connected by the required deadline.

Pulling the strings

Deals like this involve what Fislage, Deutche Bank’s Frankfurt-based managing director and global head of asset finance and leasing, describes as “pulling together the intellectual strings”. Fislage believes that this intellectual power stems from a rejigging of the Deutsche Bank operation which has seen its project development, development capital arranging, project financing, project advisory and project equity arranging functions all brought together into a single infrastructure and renewable energy finance team.

The new structure sees three team co-heads working closely but with a different focus. Dominik Thumfart in London is responsible for deal origination, risk taking and renewable energy project development; Michael Volkermann in Frankfurt is responsible for project finance execution in Europe, the Middle East and Africa; and New York-based Joy Chatterjee oversees project finance execution in North America.   

Achieving this organisational logic has been a key building block in what has essentially been the attempted renaissance of Deutsche Bank in the project finance arena over the last few years as it seeks – like a once-great football team – to re-establish the glory days. Fislage reflects: “In the mid-90s margins [in project finance] were high, deals were structured strongly, and I’d say Deutsche Bank was the strongest bank in project finance for around 10 years.”

And then things changed. “In 2003, we largely exited project finance,” says Fislage. “Margins were driven down and we saw some very aggressive structures with 5 percent equity rather than 30 percent.”

When the global financial crisis came along in 2008 and swept away these more aggressive financing models, Deutsche Bank saw an opportunity to re-enter a more rational market. “There was sharp re-pricing and some value-destroying models disappeared. We had a clean slate on our books and we decided to open up and do more business.”

Less aggressive

But while financing structures may have become less aggressive, it’s also a market where loan tenors have shrunk, banking consolidation has taken place and one which has had to adapt to continuing shocks to the economic system such as the sovereign debt crises. Fislage acknowledges this: “You have to deal with a ‘what if’ environment and decide whether there is likely to be pricing volatility and, ultimately, whether the project is sustainable. It can be complex with public-to-private deals, there’s a lot to get your head around.”

One response to the challenges is to identify innovative ways of doing business, as alluded to earlier. Another is to select areas of the market where volatility is less of a factor. And that’s why renewable energy has become a major part of Deutsche Bank’s focus. “Most contracts involve feed-in tariff mechanisms or power purchase agreements with off-takers,” points out Fislage. “This makes renewable energy deals more possible to fund in principle. There has been huge investment in Spain and Germany but still a lot of growth available in most of continental Europe and North America.”

Of course, renewable energy has not come without risks. Mention solar photovoltaic investments in Spain to an equity investor and you can expect an animated response. For debt providers, the effects of the retroactive subsidy reductions which shocked the industry last year are not likely to prove so crippling. Nonetheless, Fislage acknowledges: “Retroactive changes don’t go down well with the banks. They want stability and certainty.”

Perhaps influenced by the evidence that certain individual countries might seek to change the rules of the game, Fislage points out that diversification is an important aspect of Deutsche Bank’s renewable energy portfolio contruction. As an example, he says: “In Europe, you have mostly feed-in tariff regimes, whereas in the US it’s long-term power purchase agreements or tax incentives. Doing both provides portfolio diversification.”

He adds that diversification can also be achieved within a North American context, given the contrast between Canada’s domination by European banks and long-term funding and the US’ prevalence of fixed income investors and funding of a shorter-term nature.

Changing role

This leads on to a conversation about the role of banks in the long-term financing of infrastructure assets at a time when, to use Fislage’s words, “Basle 3 is knocking on the door”. He believes that pensions will provide the long-term funding that infrastructure requires while “banks will continue to be intermediators”.

He adds: “The days where banks put assets on their books for 20 to 30 years are over due to the issue of capitalisation. You just can’t have a large percentage of your balance sheet tied up for the very long term.”

No one could describe Deutsche Bank’s six-month Italian solar bridge financing as long term, nor will such deals necessarily be a staple of the bank’s portfolio going forward. It does underline one thing, though: adaptability to today’s market conditions is a crucial quality for any bank seeking to establish a strong position in project finance.