The importance of trust

Head to the website of your average corporate trust services provider to project finance transactions and you will find a variety of different roles mentioned: administrative agent, facility agent, collateral agent, account bank and bond trustee among them. Indeed, trying to keep track of all the different roles can be quite mindboggling.

Therefore, it may help to think of the corporate trust provider as the oil that wheels the machine – making sure that the day-to-day management of large bond and debt financings are taken care of. Among these roles is what Gary Webb, head of global sales and relationship management, corporate trust and issuer services, at BNP Paribas Securities Services in London, describes as “making sure cash goes to the right people at the right time”.

Corporate trust is arguably becoming a more important role as project financing becomes more complex. “Changing banking regulations have…altered the project finance landscape,” notes Will Marder, director and global product manager for project finance in Deutsche Bank’s global transaction banking operation in New York.

“Some of the traditionally active players have left the space, creating a need for capital. Some of that capital requirement has been provided by export credit agencies, who are doing more direct lending today than pre-crisis.”

He adds: “In general, transactions have become more complex, and there is a growing desire for high quality deal management. Lenders want to know that covenants are being tracked and that projects are operating in accordance with their original assumptions. Lenders also want to feel confident that collateral is being adequately protected and that reserve accounts are fully funded.”

THE FIPP SIDE

Citing specific examples of how this complexity has impacted Deutsche Bank’s business, Marder points to the US Department of Energy’s (DOE) Financial Institution Partnership Program (FIPP), which was rolled out as part of the American Recovery and Reinvestment Act.

Marder says: “We studied that program very closely and realised that there was a need for an experienced agent who could oversee large, complex transactions and work closely with the DOE. We are currently serving in a number of agency roles on Shepherds Flat and Desert Sunlight, two multibillion dollar renewable energy projects that received guarantees under the FIPP.”

Asked for an example of the corporate trust implications of a project benefitting from FIPP guarantees, Marder says: “The DOE actually approves all of the construction draw requests and benefits from significant cure rights and standstill periods during which they can act to work out problems at the project before the lenders step in. This means that the administrative agent must guide each request from the borrower through the proper channels, making sure that it gets to the proper parties in the proper order.”

Corporate trust providers have had to adapt to both increasing complexity as well as what some are seeing as the increasing preponderance of loan over bond transactions. As Jo Murray, London-based managing director at BNY Mellon Corporate Trust, explains: “You traditionally saw lending by way of both bonds and loans, but the bonds have fallen away with the loss of the monoline insurers. We have focused on building our skill sets and gradually expanding the services we offer. Demand has increased and there will be an increasing expansion of our role.”

But while loans have, to a degree, moved into the vacuum left by the departure of the monolines, Webb points to pressure in the opposite direction – namely, the regulatory pressure on banks when it comes to long-term lending. “Banks are being punished for having debt on their books, not just in the infrastructure space but with respect to their entire lending book,” he says. One corollary is that “we’re seeing project refinancings where term lending is replaced by a securities package”.

THE ADVANCE OF THIRD PARTIES

Another transition observed in the corporate trust services market is towards third-party provision, rather than aspects of the administrative function being performed by members of lending syndicates. “The Crisis meant there was a bigger demand for transparency and for the administrator to be a non-participant in the lending syndicate,” says Alex Tsarnas, head of US corporate and insurance market segments at BNY Mellon Corporate Trust in New York. “That has been increasingly the case in the US. As we’re not in the lending syndicate, we perform all the necessary roles and have no financial interest in the project.”

Marder outlines three key reasons why third-party provision is likely to be favoured. “The most obvious advantage is that it provides an outsourcing solution for lenders who simply don’t have that capability in-house, or for those who don’t consider it to be a core competency. There is no upside from managing a deal perfectly, only downside from making a mistake.”

“In addition,” he adds, “a third-party agent may be able to take on more roles than could someone who is a lender on the transaction. For example, we might serve as administrative agent on senior and junior tranches of debt, as well as act as bond trustee. Our potential for conflicts of interest is greatly reduced as we have no credit exposure on the transaction. Finally, having a third-party agent keeps deal teams focused on managing risk, rather than spending time on chasing covenant compliance items, for example.”

Murray adds that, with the diversity of funding sources in project finance showing signs of increasing, third-party corporate trust services providers could be seen as a source of stability. “There is a diversity of people coming into project finance,” she notes. “Traditionally it has been banks but you could see pension funds, insurers and infrastructure funds. Political factors have led to a diversification of the investor base and some of those looking will not be constant participants through the project finance life cycle. In this situation, a third party can provide stability.”

This constant presence in a deal is important given that project finance transactions often last 20 years or more. “We can be involved for a very long time,” adds Murray. “It can be throughout the construction and operational phases until he financing is paid down. We have deals we’ve been working on for 10 years.” She points out, however, that the intensity of the firm’s involvement is greater at the beginning than at the end. “Deals are most active at the construction phase and that’s when there is most interaction and most demand for our services. That’s where we build our reputation. At the operational phase it’s simpler.”

EMERGING MARKETS IN FAVOUR

One consideration for those involved in project finance is the level of deal flow, with the market having taken a hit post-Crisis.  According to a recent survey by VB/Research, total project finance activity in the clean energy sector totalled $34.4 billion in the first quarter of this year, the lowest quarterly figure since the third quarter of 2010. There are also concerns that loans and subsidies for clean energy project finance may dry up.

However, the same survey noted that emerging markets had “come alive”, with Brazil leading the way as South America saw $3.2 billion of activity in the first quarter– double the quarterly average of $1.6 billion it experienced last year. Giving weight to the statistics, BNP Paribas’ Webb says: “We have seen expansion in emerging markets recently, especially in Latin American energy such as wind and hydro power.”

The next chapter, then, could be one of geographic diversification. But corporate trust service providers are accustomed to demonstrating an ability to adapt.