Refinancing – the gun to the head

How much of the infrastructure debt overhang will the bond market be asked to digest? And does it have the appetite, asks Andy Thomson.

For a healthy infrastructure financing environment to exist, there must first be a flourishing bond market. This was something that all six participants at our recent European financing roundtable in London could unequivocally agree on during a lively and entertaining discussion.  

The reason for it is clear. During the pre-Crisis boom, banks were queuing up to be long-term debt providers to infrastructure deals and projects. In the post-crisis age of austerity and caution, even banks willing to lend for as long as, let’s say, seven years (a relatively short term by the standards of a few years ago) will have a sharp focus on a capital markets take-out and the opportunity it offers to churn capital.

The idea that banks should only have exposure to the construction phase of projects before refinancing in the bond market is, in fact, received wisdom in the infrastructure universe. But the misplacing of this received wisdom during the go-go days means there is now a huge backlog of long-term infrastructure-related debt being held by the banks (especially the European banks, incidentally, which arguably punch above their weight in global infrastructure lending). 

There are two outcomes that may flow from this – neither of which is a particularly appetising prospect for those hoping to see infrastructure deal bottlenecks eased.

One is that banks – unwilling to sell at what they see as below-market pricing – may hold onto this debt and thereby not release capital to re-lend (the vital process of capital churn, referred to earlier). There is already some evidence of this.

A second, contrary outcome is that so much debt heads to the bond market for refinancing that it simply cannot cope. There is some evidence of this, too. Even where some members of a consortium push to extend existing debt facilities, other members may be unwilling to countenance such action, having already decided to reduce their infrastructure exposure.  In this instance, the bond market may not be first choice but may still end up being the route taken.

Spence Clunie, a senior managing director at Macquarie Capital Advisors in London with responsibility for UK and European debt finance, said there was “strong appetite” for infrastructure bond issues at the moment. Clunie pointed to examples of train rolling stock companies, water companies and toll roads all having successfully accessed the bond market in recent times.

Whether this appetite would be sufficient to digest a sudden spike in activity remains to be seen. Caution about refinancing prospects was understandably reflected in the views around the table.

“A two-year bridge to a bond or securitisation was pretty common a couple of years ago, but equity investors would now be wary unless it’s a highly regulated asset,” said Raj Rao of fund manager Global Infrastructure Partners. “Investors don’t want a refinancing gun to their heads.”

Note to readers: the September 2010 edition of Infrastructure Investor magazine includes our European infrastructure financing roundtable in which six leading professionals discuss their views of the market. The six are: Spence Clunie (Macquarie); Gershon Cohen (Lloyds Banking Group); Cheryl Fisher (European Investment Bank); Thomas Meier (European Bank for Reconstruction and Development); Martin Pugh (Bilfinger Berger Project Investments); and Raj Rao (Global Infrastructure Partners)