When the subject of bank financing crops up in an infrastructure context, you can generally feel quite confident about how the conversation will progress – the departure of many banks from project financing, the reluctance of banks to provide long-term lending, the pressure they are under from regulators etc. It will be an interesting conversation – but not necessarily the most upbeat.
Talk to Michael Dinham, ING’s managing director and head of infrastructure finance EMEA (Europe, Middle East and Africa), and you will get no hint of gloom and doom. “The market is very different depending on who’s eyes you’re looking through,” he insists. “The range of business we do is quite broad, and more than half of our activity last year was refinancings. I sometimes hear other banks complaining that there are too many refinancings. Why? They take half the time of an acquisition for similar fees.”
He continues: “For many lenders, things are very active. We have a broad geographic remit and sector remit, including the likes of public-private partnerships (PPPs), regulated utilities, transport assets and hybrids. So if one part of the market is flat at any given point in time, such as UK PFI [Private Finance Initiative], it doesn’t affect us too much.”
RIDING THE WAVE
I reverse back to the point about refinancings and the much hyped “refinancing wave”. How far into the wave are we, and has refinancing activity transpired in the way that Dinham anticipated? “I’d say we’re some way through the wave, maybe halfway through. And it’s manageable deal flow because, to a degree, you know when the refinancings will arise.”
There are some exceptions to this, however. “They might come early [to the refinancing market] where there are cash sweeps [in the capital structure]. [Equity] sponsors hate them because the yield dries up when the sweep kicks in, so they are more or less forced to refinance. On the other hand, some infrastructure assets are so overleveraged the sponsors are pushing back the day when they have to get out their cheque book.”
So refinancings are keeping the likes of Dinham busy. But that’s not all. There are a number of other reasons why he believes the death of the infrastructure banker has been greatly exaggerated. For one thing, he says there are deals that would have been done by banks’ leveraged finance divisions in times gone by that are now being pushed to the infrastructure teams.
“We’ve captured the low-risk end of leveraged finance,” is how he expresses it. “There are deals that may have caused an internal bun fight four or five years ago between the leveraged finance and infrastructure finance teams. Now, they tend to get put our way because infrastructure is seen as more stable and it’s easier to get approval for the loan.”
He also thinks that competing sources of finance, such as the bond market, can be overestimated.
“What never ceases to surprise me,” he says, “is banks’ ability to price aggressively low relative to bond market pricing. I have seen cases where banks were prepared to accept the client’s proposed pricing without argument, even where that client had bond finance in place which was trading at much higher levels. So it’s not that the bond market doesn’t offer a viable alternative, it’s often simply the case that sponsors often have no incentive to go to the bond market.”
But what about regulation, I ask. Surely everyone is in agreement that the Basle III rules on capital adequacy act as a disincentive to long-term lending? Dinham doesn’t disagree, but he does think that the issue has been overblown. “What proportion of the balance sheet is tied up in long-term infrastructure loans?” he asks, rhetorically. “Only a small fraction, not even one percent, of the bank’s assets are tied up in this particular loan category and I am sure that is the case with most banks.”
In any case, Dinham is no fan of long loan tenors. “My issue with long-term bank loans is that they have a fundamental flaw,” he says. “One party is free to change the price and the other party isn’t. As the bank, you have a fixed term and margin but the client can refinance at any time without penalty.” He does acknowledge, however, that “the counter-argument is that you price in at the beginning the possibility that you’ll be refinanced”.
MISSING A TRICK
In recent times, there has been much speculation about the role of institutions such as pension funds playing a greater role in providing long-term infrastructure finance. Dinham believes this is indeed a role they could play, and that they may be missing a trick by not doing so.
“I think what it boils down to is that institutions don’t have structured finance teams,” he says. “They’re not staffed to structure and manage deals. The ink is often barely dry on a deal when the first waiver requests are coming in. It’s a bespoke product that needs a bespoke team – and it’s hard to justify the expense unless there’s steady deal flow. But I think it would pay for itself fairly quickly. Of course, you will still have the issue of liquidity to address, but how liquid are most bond issues? I don’t think institutions are fully appreciating the possibilities.”
He also thinks institutions are unecessarily hung up on construction risk. “I can’t understand why construction risk is such a problem. In 20 years of infrastructure lending on greenfield projects we have barely encountered a problem with construction risk. I’ve had a few problems with commissioning, with getting something to work. But getting things built is rarely a problem.”
He continues: “Institutions need to get round it. Our experience is that construction risk is no problem at all relative to other risks like traffic risk. Ultimately, there is an embedded view that institutions won’t take construction risk and I think they need to challenge this.”
EMERGING, NOT RISKY
Dinham has already attempted to clear up a few misconceptions. Before the conversation ends, he broaches another one: that emerging markets – where ING is increasingly looking to expand its business – are necessarily more risky places for banks to operate than the developed markets of the West.
“In the US, it can be tricky for lenders because of [the] bankruptcy code and complexity of the legal system. If a deal is in difficulty there are many ways to keep lenders at arm’s length. It can be a highly adversarial system due to the complexity of the system. In markets like Russia, for example, where the legal system is less developed, you might not be any worse off in the long run.”
Dinham does concede that a lack of a cost-effective insurance market can be a problem in Russia as well as other emerging markets the firm is looking to cultivate such as Turkey and India. Ultimately, however:
“They are the markets of the future and, while banks are deleveraging at the moment, they still need to grow.”
The need for growth is an appropriate note on which to conclude the conversation.
For those who look at infrastructure banking and see only decline, Dinham has a very different message.