Just 48 hours after US President Barack Obama delivered his ‘State of the Union’ address, Joel Moser is finishing his lunch at Michael’s, a classy New York eatery. The Kaye Scholer partner is a regular here, warmly received by the owner and waiting staff, and is seated at his usual table talking about his twin passions: infrastructure and politics.
Moser is relaxed and upbeat, with good reason. A lawyer who joined Scholer from rival Bingham McCutchen last spring, he’s in the right line of work. In the US, no asset class is more subject to the direction and swings of public policy than infrastructure. In addition to being a walking, talking project finance compendium, Moser is a voracious Beltway-watcher, and President Obama, in his address, again made infrastructure a talking point.
Today, however, is Valentine’s Day. The restaurant has pleasantly surprised Moser by bringing him a delicious strawberry mousse for dessert. He’s less concerned about the latest infrastructure-related lip-service from the White House than with wrapping up at the office and getting home to his family.
Moreover, while having the leader of the free world give a shout-out to infrastructure investment is a nice shot in the arm, the nitty-gritty of public funding for infrastructure is a different, much harder discussion to have altogether. For Moser, that discussion is the one worth having. In 2013, debt financing, rather than its traditionally more glitzy counterpart – equity financing – has become a compelling part of the infrastructure investment discussion in the US.
Last year, the Transportation Infrastructure Finance and Innovation Act (TIFIA), a federal credit programme to fund transportation infrastructure, increased from $120 million in 2012 to $750 million. Meanwhile, tax-exempt Private Activity Bond (PAB) issuance totaled half of its $15 billion cap as of January 1. For water and wastewater management, the Water Infrastructure Finance and Innovation Act (WIFIA), modeled on TIFIA, has been introduced in the US Senate. Renewable energy has the US Department of Energy’s ‘1703 Loan Program’.
Not counting government funding, debt financing in America is evolving, with the emergence of alternative and non-traditional debt financing – including the debt fund proliferation – brought about in part by the Eurozone banking crisis. As John Ryan, a managing director with Greengate, a project and infrastructure debt financing advisory firm in Washington, D.C., noted, European commercial banking has traditionally provided 90 percent of project finance debt globally.
“TIFIA is the tool…and PAB legislation is a critical ingredient,” muses Moser, pointing out Brazil and Japan are also proving to be new sources of infrastructure debt financing.
“We need every source of funding we can get,” Moser says.
“I view TIFIA positively. We have had a good experience working with it,” says Chris Voyce.
Voyce is a senior managing director at Macquarie Capital, the advisory business of Macquarie Group. A public-private partnership (PPP; P3) expert focused on North America, he can rattle off each TIFIA-funded project Macquarie has advised: the 2008 ‘LBJ Express’ project in Texas (which received $850 million from TIFIA); the 2009 ‘Interstate 595 Express Corridor Improvement Project’ in Florida ($700 million); the Port of Miami Tunnel ($341 million); and the ‘Downtown Tunnel/Midtown Tunnel/MLK Extension’ project ($442 million).
Each aforementioned PPP is characteristic of project financing: each is an asset with a narrowly defined, long-term purpose or function; an asset that is long-lived, capital-intensive, and with a specific functional or geographical definition; or, an asset that is a low-risk, low-return, and long-term investment. Above all, each asset is attractive to private capital interested in relative value and upside potential.
“The combination of TIFIA and PABs really has taken out of the debate any question about P3s,” said Voyce. “People who are anti-PPP have a harder argument to make that the cost of capital is higher.”
Tracing TIFIA back to its 1998 inception, Voyce praises the development of the federal credit programme.
“Early on, it was not being used very well,” he says. “Walk before running. Well, now [TIFIA] is running”.
Voyce also says “the debt fund trend is a trend that will continue”.
Liquidity through subsidy
To Nick Cleary, TIFIA and tax-exempt innovations “have helped the sector as a whole, by providing liquidity – through a subsidy”.
The challenge for Hastings Funds Management – the equity and debt fund specialist with $8.5 billion in capital where Cleary is director of infrastructure debt in New York – is that “it can crowd out private participation. Anything like TIFIA and tax exemptions can limit private capital participation. That tax-exempt market has been very competitive but at a cost to government tax revenue. We work with a global client base that has a large appetite but many can not value and participate in the tax-exempt market”.
He does however see positives in the changing landscape of debt financing Cleary has seen of late.
“There is a long-term structural change occurring right now,” Cleary says, noting the recent loss of funding that was once the province of Eurozone banking. “The scale of financing needed is beyond what the capital markets can supply. In the past, that market has supplied 15 percent while the heavy lifting has been done by banking. The change is going to be gradual, and reduce their [the banks] participation, which is going to open up opportunities for institutional investors.”
Debt financing, in the past, has been the skill set of banking, with a nod to insurance, says Cleary.
“The trend is that expertise migrating from banking to asset management to facilitate institutional investor participation,” he explains. “That is where Hastings came in. A majority of us got our skill and understanding from banking. A lot of that skill had been sitting in banking.”
For Cleary, Hastings, a 19-year-old company, has a unique mandate in infrastructure debt investment.
“We mediate between the investor and those seeking their capital,” Cleary says. “For investors, infrastructure debt is between alternative asset and credit or fixed income allocations, but fundamentally analogous to credit – it can be fixed or floating. What we are looking to do is work with them, and to find a way to efficiently access those opportunities”.
Ryan, for his part, is apt to cite hard data to support his belief that debt financing is both critical and expanding.
According to McKinsey Global Institute, infrastructure project finance debt volume is likely to grow at least in line with infrastructure spending globally, estimated to be approximately $3.4 trillion from 2013 to 2030, or $225 billion to $350 billion per year. In 2012, infrastructure debt global volume hit approximately $200 billion.
The data would not surprise Moser. As he departs Michael’s and steps out into the blustery Big Apple winter, he makes it clear: without debt financing, infrastructure will not get done.