Q: How has infrastructure funding evolved over the years?
WM: If you look at the landscape of project finance lenders over the past 10 to 15 years, we’ve had a lot of big commercial banks that historically have arranged transactions. Before the credit crisis, you had more of a retail syndication model, where you might have a single bank or a couple of banks arrange a very large transaction and then syndicate it out. Post-financial crisis, we saw the emergence of this club-style of financing a transaction, where the bank group is effectively formed before closing. That meant you might have five to seven banks that all come in at the same time and together structure and fund a deal, removing the risk of retail syndication.
Now we’re seeing increased activity from institutional investors. In the past, you might have seen life insurance companies and asset managers coming into the market more as participants and taking large positions in transactions that were originated and structured by others. Now they’re taking a much more hands-on approach, not only originating and structuring transactions on their own, but funding transactions as well. Those active institutional investors are funding initiatives themselves, and often with more of an appetite for putting that money to work over longer durations than maybe the banks are offering. Many of the commercial banks have looked to pull back from those 15- to 18-year deals and look to do more six- or seven-year deals.
The institutional investors are still interested in lending long term because the nature of their business hasn’t changed. They have insurance premiums, for example, that need to be put to work for very long periods of time. Consequently, they like the long-life nature of this asset class, where you might have a project that has a useful life of 20-plus years.
Q: Are you seeing new players entering the market?
WM: We’ve seen, certainly over the past 12 to 18 months, an explosion in terms of the number of specialty infrastructure funds that are coming to the market. These funds are often owned by or set up by big institutional investors like life insurance companies, pension funds, and asset managers. The deals are typically very well-structured: the risks are well-known and allocated to the right parties, and they’ve got a lot of capital that they’re looking to expend over long periods of time.
I think with the interest rate environment being so low for so long, infrastructure is an asset class where people feel they can find some additional yield. And because of the well-structured nature of these transactions, that additional yield comes with a reasonable amount of additional risk.
Q: You mention partnerships between commercial banks and institutional investors – how do those work in practice?
WM: Those partnerships are really interesting because you’re effectively creating a combination of commercial bank debt and institutional investor debt. I’d say historically the institutional investors have not wanted to participate in construction financing for projects, because they really haven’t been well set up to do periodic construction drawdowns. They like to invest the capital all at once on day one and let that investment roll off over a very long period. Conversely, commercial banks are better suited to make those periodic fundings, and they can set short-term, LIBOR-based borrowings, whereas the institutional investors are typically looking for fixed-rate debt.
When you bring those two sources of capital together, you bring those characteristics together. That, along with the fact that banks are looking for shorter periods, while the institutional investors continue to seek longer tenures, equates to a really neat structure where you’re bringing together two different financial institutions, with different capabilities and different sorts of desires, to provide a borrower with increased flexibility in terms of drawdown and construction, along with the long-dated capital that they like to have on these deals.
Q: What do those new entrants need to think about and how does a corporate trust provider get involved in that process?
WM: We help to solve two different problems in two different scenarios.
One is helping these new entrants coming into the market. Very often, you have foreign investors coming over looking to put capital to work in the U.S. project finance market, and that organisation’s team is primarily focused on originating and structuring transactions. They may not have a team that can handle all the necessary back-office functionality, in turn they may not be set up to process fundings, set interest rates, and invoice clients for principal, interest, and fees, for example.
We team up with them and act as an outsourcing solution to effectively be a local back office to help them manage those transactions, so they don’t have to reinvent the wheel. It lets their team really focus on the job of finding opportunities to put all that capital to work.
The other scenario in which we’re getting involved is in the larger, more complex transactions being done in the marketplace. A good example is if you look at some of these offshore wind farms that are being contemplated right now. For example, there is an 800 megawatt project in the works off the coast of Massachusetts and that’s probably going to involve billions of dollars of debt. That means you’re going to have multiple lender groups, as you won’t find billions of dollars simply in the U.S. commercial bank market—it’s going to involve commercial banks and institutional investors, and potentially even other specialty financial organisations, like export credit agencies. As a third-party provider of agency services, we can come in and we can be an administrative agent for the lenders, a trustee for the bondholders, and a facility agent for an export credit agency.
We can even play a role that spans all those different types of debt where we serve as an inter-creditor agent, effectively as a central point of contact. Borrowers can come to us and we can handle that flow of cash and information across multiple groups of lenders.
Q: Finally, what makes a good corporate trust agent and what are the strengths of using third-party providers?
WM: Very often, the decision around which agent to use is left to the last minute because many people treat the agency roles like commodities. They may not necessarily appreciate the difference between providers.
We pride ourselves on providing excellent, hands-on service. I think there is more differentiation now as you get into the concept of using a third-party administrative agent, where the agent is not a lender on that transaction. We’ve seen more and more interest in this, so it would come down to a specialised corporate trust service provider like Wilmington Trust to enter a deal and be an independent agent.
This role is advantageous because we typically live with a transaction through its entire lifecycle—from construction, to COD, and through its operating phase to maturity of the financing. We are not entering and exiting through syndication or selling down and leaving a deal at some point in the future. We provide stability and we provide clients with a place where they can turn for information and assistance at any point in a deal’s life.
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