Regulatory pressures coupled with macroeconomic uncertainties have led banks to “reinvent themselves from long-term facilitators to short-term creditors,” Michael Wilkins, managing director of S&P’s infrastructure finance unit, told Private Debt Investor,Infrastructure Investor’s sister publication.
“There is a general reluctance from banks to lend on long-term projects of anything beyond seven years,” he added. Wilkins argues that the withdrawal of bank funding for long-term infrastructure projects has given rise to considerable appetite from insurance companies and pension funds to fill the hole.
“Refinancing of infrastructure assets typically allow a sponsor to distribute any excess cash generated by the business over the maturity of the debt, subject to the satisfaction of certain covenants,” explains Wilkins.
Sergio Ronga, head of debt refinancing infrastructure projects at DC Advisory, believes the financial crisis raised sponsors’ awareness and sensitivity to liquidity and volatility in the debt markets, and as a result a number of assets refinanced the underlying debt well ahead of maturity.
“A large number of borrowers in the infrastructure sector have addressed the refinancing risk on their debt funding,” says Ronga.
Ronga highlights that active bond markets have assisted with this process in recent years, as bank debt funding was replaced with bond funding at the time of refinancing. “Bond funding also allows borrowers to raise longer-term debt tranches, often rated strong investment grade by the rating agencies,” he adds.
Despite this, Ronga believes refinancing risk has not disappeared altogether. “A number of assets still require refinancing, but sponsors are reluctant to address this issue as the assets are often over-levered or underperforming. As maturity of the debt approaches, the debt on these assets will have to be restructured and/ or sponsors will have to inject additional equity into the businesses.”