Question & Answer: Dana Levenson

When the City of Chicago closed on the $1.83 billion deal to lease the Chicago Skyway in January 2005, many market observers rightly thought it the beginning of something big. After all, take that enterprise value, multiply it times the entire stock of similar infrastructure in the United States and you could easily get to a value in the trillions.

Dana Levenson

Five years later, the infrastructure market in the US, in many ways initiated by Chicago's high-profile asset leases, is still alive and growing, despite a severe financial crisis that very nearly ground it to a halt in 2009.

Dana Levenson, chief financial officer of Chicago at the time of the Skyway deal, reflects on where the market's been since he left the city in 2007 to join RBS as the head of infrastructure for North America – and why, this time around, the optimism surrounding the market is not unwarranted.

II: What’s been keeping you busy in 2010?
Levenson: What’s happened so far this year is there is more activity going on in infrastructure than we’ve seen at any time since 2005 and 2006.  For us, we started with the I-4 interchange and Port of Miami Tunnels deals closing late in 2009, followed by our Stony Trail advisory kicking in, which just closed in March this year.  Subsequently, the Ruby Pipeline and McGill Hospital deals have closed, the latter just this past Thursday. 
 
So has deal activity come back?
It has come back, but more quietly and steadily than conventional thinking might assume, especially given the magnitude of the activity that’s been taking place.  In fact, we did a little study in our

Infrastructure is finally going to hit its stride over the next two years

group of all the non-power PPP deals that are being talked about and are in various stages of development.  Now, not all of them are going to get done, but just the sheer number of them – and these are in Canada, the United States, they’re surface transportation, they’re parking, they’re social – is 49.  Even if, say, 12 or 13 get done, that’s a lot.
 
Is that more or less deal flow than you would have expected in mid-2009?
There was much more activity than I would have expected, especially given the dismal pace and overall atmosphere during 2008 and the first half of 2009.
 
What do you credit this recovery to?
I think the funds are being far more focused on what they could, or, better yet, should buy.  Funds are saying, ‘there are certain assets we like and there are certain assets we don’t know enough

There was much more activity than I would have expected

about to like,’ and they’re going after the assets they like. I think that the strategics have been very, very constructive – no pun intended – in terms of not only putting up equity but also in terms of looking at structures that they had not seen before. Denver FasTracks is a pretty good example. That could be a template for the infrastructure business going into the future.
 
What about government sponsors?
Plus, you have governments that are willing to listen to the private equity equation when it comes to getting their infrastructure financed. I would tell you that’s probably not as much of a blanket statement as I’d like to make because I think there are some governments that get it and a lot of others that still don’t. But, on balance, there are more that get it now than there used to be.
 
Do any governments in particular ‘get it’?
Well, I always put Chicago at the top of the list for that one.  I would say, where deals are getting

Now is a pretty good time for infrastructure to test the corporate bond market

done or are in the process of getting done is where governments get it. Pittsburgh, for instance. Florida continues to be an extraordinarily receptive area for projects that have a private financing component, Virginia is still very, very amenable, and Georgia, Maryland and Michigan as well.  Frankly the whole country of Canada is a wellspring of infrastructure financing amenability.
 
What portion of the recovery is due to the comeback in the credit markets?
The credit markets have done extraordinarily well in terms of improving from their nadir a little bit over a year ago. We saw at first the opening of the corporate bond market, where spreads had gapped out to unprecedented levels, as investors took note of those credit spreads and did their level best to narrow them by buying billions and billions of bonds. Private placements also recovered along the same lines, albeit with smaller volumes. 
 
What about the bank market?

The bank market was the last to recover, but it has done so and quite dramatically

The bank market was the last to recover, but it has done so and quite dramatically.  If you look at both tenors and pricing, which are the two metrics that everybody sees as the major barometers of the health of the bank market, tenors have gotten longer, and pricing has gotten lower.
 
How much bank financing is available for any single deal?
I’m going to say in the neighborhood of a billion and a half to two billion, depending of course on the asset. At the height of the crisis, I don’t even think it was even a billion.
 
What’s the price differential between now and the height of the crisis?
There always had been money for infrastructure available from the banks, which is a good thing. But the price was very high. It was Libor plus probably 350 to 400 [basis points], in some cases. The full component is probably now Libor plus 200-250.  So, just like you’ve seen a huge recovery from the wider to the narrower spreads of the corporate market, you’ve seen a huge recovery in the wider spreads of the bank market to levels that are far more palatable to the borrowers.
 
So who would you say is winning now in the bank debt vs. bond debate?
I think it’s bank debt.  But I think that’s probably going to change at some point soon to favor the bond market.  Recently, though, it would have been very difficult to do an infrastructure bond deal in the midst of what was going on in the standard corporate bond market. Because what was going on in the standard corporate bond market was anything but standard. It was literally the largest volume that the debt market has ever seen. For an infrastructure bond to get the attention of the corporate buyers at that time would have been extraordinarily difficult.
 
Is that still the case?
The corporate bond market has certainly slowed down. Instead of having 18 deals a week, you

The funds are being far more focused on what they could, or better yet, should buy

probably have six or seven. The individual deals are no longer in the multi-billions in terms of the volume getting done; rather, it’s in the hundreds of millions.  As such, I think now is a pretty good time for infrastructure to test the corporate bond market because infrastructure bonds will now get the attention of those corporate bond buyers. That, frankly, is the buyer universe that will be most appropriate for infrastructure bonds.
 
But now those corporate bond buyers can also buy the newly-introduced “Build America Bonds” . Should infrastructure investors embrace or be afraid of Build America Bonds?
If you’re talking about infrastructure investors making an investment in Build America Bonds, I don’t think they meet the standard equity infrastructure sponsors’ targets at all, if you look at the level at which they’re issued. So I think that might be a place where there’s a parting of the ways between infrastructure investors and the municipalities that issue them to finance their infrastructure.  They are, if used for what they’re supposed to be, a marvelous invention, though, really for the issuing municipalities. 
 
What is your outlook for the remainder of the year?
We think that if the distribution market comes back and there are more investors that are willing to take risk on their balance

Frankly, we were wrong

sheet for infrastructure assets – which there certainly are now, more than there were a year ago – all that bodes well for infrastructure projects getting done with bank financing, with bond financing. And in general, I think infrastructure is finally going to hit its stride over the next two years in terms of deals getting done, one after another after another.
 
That’s been said before.
The difference is – back in 2006 and 2007 – where everybody expected this explosion of deals, frankly, we were wrong. What we should have expected was that infrastructure as an asset class was going to develop at its own pace with it's own characteristics and not necessarily as a mirror reflection of the activity during those first couple of years.
 
Who will win the World Cup?
Spain.