Signs of life in project finance(3)

Is this week’s wrap-up of the £6.2bn PFI for London’s M25 motorway a sign that the project finance market is finally getting going again, asks Chris Josselyn.

Yesterday’s signing of the M25 widening public-private partnership project has shown that private finance initiative (PFI) projects are not dead.

The £6.2 billion (€7.1 billion; $9.7 billion) transaction reached financial close after several months of negotiations, demonstrating that despite the difficulties in raising any kind of finance in the current market, large-scale privately-financed infrastructure schemes can still get done, albeit with debt margins considerably higher than they have been in the past.

In this case a large syndicate of banks was able to lend almost £1 billion to the project. The role of the European Investment Bank in this cannot be played down. Once transactions reach the credit committee stage, the EIB can act as a calming influence. It can also chip in to plug any shortfalls in the required debt.

The UK government will have breathed a huge sigh of relief that its continuing commitment to procuring flagship infrastructure projects of national importance can still work during a recession. The deal will also go some way to answering PFI critics, who said the model was no longer valid in a market where bank lending has all but dried up. The Treasury’s new infrastructure finance unit, set up in March to come to the aid of projects struggling to raise adequate financing, wasn’t even called upon in the end.

One source we spoke to went as far as describing the closure of the deal in the current conditions as a “miracle”.

The deal will not cure all the liquidity issues in the project financing market overnight. But there is now hope that the successful completion of the deal will trickle down into smaller bread-and-butter PFI deals and reinvigorate the funding market.

Such a change of capital markets sentiment could also make a difference to BAA’s auction for Gatwick Airport. This week this saga took another fascinating turn. After the dismissal of the Citi-led Lysander consortium from the proceedings last week, the bid led by Global Infrastructure Partners now appears to have been rejected too. This leaves the Manchester Airports Group and Borealis joint venture the only participant still in contention for the West Sussex airport, although there remains a very strong possibility that a GIP re-bid could materialise.

Why Ferrovial-owned airport operator BAA has apparently narrowed the bidding line-up at this stage, thus limiting the competitive tension in the process, is unclear. What is clear is that it needs to shift Gatwick off its books by next March at the latest in order to meet its debt commitments.

BAA also has the Competition Commission’s inquiry, which it appealed against on Monday, to worry about. Should the commission get its way, the airports operator may be forced to sell Stansted and either Edinburgh or Glasgow airports, as well as Gatwick. If that were to happen, BAA can only hope that debt markets will begin a recovery similar to what seems to be happening in project finance. BAA may hate the idea of having to sell more assets because the regulator says so; but if more debt is beginning to become available, at least the pricing might not be awful.