For those who may be inclined to see corporate trust provision as one of the more prosaic aspects of the project finance market, there is a reply that’s hard to rebut: without them, the wheels of transactions would simply fall off. In a nutshell, corporate trust professionals are the administrative workhorses making sure that the day-to-day management of large bond and debt financings are taken care of.
But because corporate trust providers want to earn a reputation for solidity and reliability, a striking contrast may be observed with the general market conditions in which they operate – here, with the drying up of long-term finance from commercial banks and the search for alternative financing sources, a state of flux prevails.
This has had a number of repercussions for corporate trust providers, one of which is that they find themselves increasingly working with state-backed development finance institutions (DFIs) rather than commercial banks. “The European Bank for Reconstruction and Development (EBRD) and European Investment Bank (EIB) have been heavily involved in recent projects. That’s good for the market because it means deals are very rigorously monitored,” says Nicola Dale, vice president, sales, at BNY Mellon in London.
Dale says DFI involvement is particularly strong in emerging markets, including road and renewable energy projects in Sub-Saharan Africa. In places like these, she says, the DFIs have enabled some very complex projects to happen that would almost certainly not have got off the ground without their involvement.
The onus is on the likes of BNY Mellon to understand how the DFIs operate and the best way to develop partnerships. Dale recalls a conversation with the African Development Bank (AfDB) where the regional DFI was asked what it expected of a corporate trust provider. “We want you to be as passionate about the project as we are,” was the disarming reply.
“Different lenders have different ways of doing things and African lenders are often very different to European lenders in terms of culture and method of working,” reflects Dale.
Aside from the need to build new relationships, there are some practical implications arising from the way financing provision has changed. One of these is what happens when a project runs into trouble and changes are required to the original lending agreement. In pre-Crisis days, the commercial lending group would have sat around the table and arrived at an agreed solution. Without commercial bank involvement, the solution is less obvious.
Gary Webb, a global network manager of debt market services at BNP Paribas Securities Services in London, says adopting this role is difficult for corporate trustees. “Our skill is monitoring and dealing with exceptions and coming up with solutions for those exceptions,” he says. “As trustee we can’t give advice to investors on what to do. There’s talk of ‘super trustees’ who could provide advice to investors on what they should do. But it would make the service very expensive.”
Webb adds that, in projects where there is involvement from a DFI such as the EIB, they will sometimes look to take a controlling stake so they can make those kinds of decisions. However, this is not always possible since some investors don’t like the existence of a controlling investor.
Perhaps the biggest transition corporate trust providers are having to make is to a market where deal flow is project finance deal flow is constrained. As alluded to by Dale, there is increasing activity in emerging markets – but in developed markets, with austerity biting, it’s a different story. Webb reflects on the situation in the UK when he says: “There are deals that have the support of the new PFI [Private Finance Initiative] structure but the volume is not great. We’re not seeing a bounce at the moment.”
Aside from the lack of deals coming through the pipeline, another potential problem in today’s world is the financial solidity expected of those providing administrative services. Dale insists this is not a problem for BNY Mellon, but acknowledges the significance of the issue:
“If you’re putting lots of money into these projects you want a stable counterparty. If there’s a bond to be rated, the rating agencies will look at the rating of the account bank. People come to us due to our rating and because we are prudent and rigorous.”
Repairing balance sheets
Indeed, Dale says BNY Mellon is potentially in a position to take over administrative roles that other financial organisations either do not want to – or are unable to – continue with. “Some of the commercial banks – to try and repair their balance sheets – have moved loans off their balance sheets where they were the administrator and they want us to pitch to take over the administration of these deals,” she says.
However, Webb believes there is a new reality – and that it’s not only the banks that have to adapt to it, but also the rating agencies. “The credit agencies are recognising that banking is no longer a triple-A industry,” he claims. “High single-A will have to be the new paradigm. Basle III makes banks stronger but it will be a while before the rating agencies start moving bank credit ratings up again.”
The key to success in corporate trust these days, it seems, it successful evolution. Things may never be quite the same again.