The Royal Bank of Scotland Group (RBS), the world’s top mandated arranger and book runner of project finance lending, is exiting the business as part of a drastic restructuring effort aimed at returning the troubled UK bank to profitability.
RBS will no longer provide long-term project finance loans with durations of 15, 20 or 30 years. It will continue to make such loans with an “appropriate length”, for example three, five or seven years, according to people familiar with the matter.
Project finance is a form of asset-backed lending where the loan is secured solely by the revenues of a project, with no recourse to the project sponsor’s balance sheet. The term traditionally refers to loans with long-term durations of 15 years or more.
The shift away from project finance will have little impact on RBS’ activities in North America, where its 12-person infrastructure finance and advisory team, headed by Dana Levenson, did not issue those kinds of loans, sources said.
None of this is rocket science. I am confident we can do it – it will just take time.
However, in the UK and Western Europe – home to 60 percent of RBS’ project finance portfolio – project finance loans were more prevalent and therefore borrowers will face a steeper cutback from RBS’ lending activities, even as the firm retains its advisory role, the sources added.
The change in strategy comes as RBS reported the largest-ever annual loss in British corporate history totalling £24.1 billion (€27 billion; $34.4 billion) for 2008. In response, the UK agreed to pump as much as £25.5 billion more into the bank and insure £302 billion of its assets: a move that could result in the company being 95 percent owned by the government.
As part of a strategic plan aimed at restoring the company to profitability, RBS will broadly separate its activities into two divisions of core and non-core assets.
The core division will contain businesses with “resilient” origination and distribution markets, while the non-core division will contain businesses with distressed asset prices and “closed” markets, RBS chief executive officer Stephen Hester told investors during a conference call.
Project finance will be placed in the non-core division along with eight other business areas, including real estate lending and leveraged finance lending. The division will be headed by Nathan Bostock, currently the chief financial officer of Abbey National Alliance & Leicester.
In real estate, the firm will no longer provide loans of any kind. It will, however, retain a real estate advisory capacity. In leveraged finance lending – loans that that are typically used to finance private equity firm’s leveraged buyout (LBOs) transactions – RBS will no longer provide financing for large-scale LBOs. It will retain its debt capital markets division, though, which will still finance smaller-size LBO transactions, sources said, declining to provide a size threshold.
RBS is not the only bank to curtail its project finance lending in the aftermath of the global credit crisis. The large size and long duration of these types of loans have made them a difficult business for cash-strapped banks in need of liquidity. Citi, another large global financial firm that has needed substantial support from its government, eliminated most of its project finance practice in July last year when it chopped its New York energy and infrastructure group.
“There are countless other banks that are not saying that they are retreating from project finance per se, but the only types of loans they are willing to do are the five-year or 18-month maturity instead of the 10-year plus-types of loans,” said a senior managing director at a rival lending instution, who declined to be named due to his firm's corporate communications policy.
“At end of the day not, I’m not sure if this announcement is all that consequential,” the person added.
Project finance has been a bright spot in the world’s debt markets. Annual issuance rose 6.3 percent globally to $262.3 billion in 2008, according to Thompson Reuters data. That level is unlikely to be surpassed anytime soon in large part because of the scaling-back in project finance by firms like Citi and RBS.
RBS has long been a powerhouse in project finance. It has consistently held the number one rank of global project finance book runner since 2003, when it replaced Citi, and the number one, two or three rank of global project finance mandated arranger since 1991, according to Thompson Reuters league tables.
RBS: long-time leader in global project finance league tables
Last year, the firm was one of the debt providers on the ultimately unsuccessful $12.8 billion lease of the Pennsylvania Turnpike: a transaction which, if closed, would have ranked as the largest-ever toll road project finance deal in North America.
No timetable has been set out for the winding down of RBS’ £16 billion project finance portfolio and other non-core businesses.
“Unfortunately because of illiquidity, we can’t chart speed of the selldown of these businesses and these assets, and indeed the costs,” Hester told investors, adding: “None of this is rocket science. I am confident we can do it – it will just take time”.