As project finance lending shrinks to a small core of committed loyalists; as regulators seem to be hell-bent on devising ways of restricting long-term lending (just at the time when it’s needed most); and as balance sheet strains following the Crisis continue to take a toll, one thing seems clear: banks are surely increasingly redundant as a source of financing for infrastructure?
Michael Dinham – head of infrastructure finance for Europe, the Middle East and Africa (EMEA) at ING – is having none of it. “Unruffled” would be an apt description of Dinham in his normal state. Hence, it was a surprise when he hurried into a meeting with Infrastructure Investor recently not quite on the dot of the agreed time and looking a little, well…ruffled. And the reason? His insistence that ING’s infrastructure financing operation is as busy as it’s ever been.
By way of example, he pointed to refinancings. That much hyped “refinancing wall” of a couple of years back is maybe only half as high now, Dinham thinks. More than half ING’s infrastructure financing activity last year was in this part of the market. And it has the added bonus that it’s lucrative – “half the time of an acquisition for similar fees” in Dinham’s words. Such activity is also being accelerated in some cases by sponsors coming to market as quickly as possible to try and eliminate cash sweeps (which dry up yield when they’re triggered).
Dinham puts forward other reasons why infrastructure banking is not such an unhappy place to be, after all. For example, deals that may have caused an internal bun fight four or five years ago between leveraged finance teams and infrastructure teams are these days routinely handed to the latter. “Infrastructure is seen as more stable and it’s easier to get approval for the loan,” Dinham explains.
He also thinks that competing sources of financing, most obviously the bond market, can be overestimated. With banks pricing aggressively low in many cases – let’s leave aside for a moment any reflections on the wisdom or otherwise of this – sponsors often have no incentive to go to the bond market, where pricing is often higher.
And, when it comes to regulatory restrictions on infrastructure lending – or future restrictions in the case of Basel III, the most obvious example – Dinham is once again relaxed. “What proportion of the balance sheet is tied up in long-term infrastructure loans?” he asks, before answering his own question – in the case of most banks, less than one percent. In other words, infrastructure is just not significant enough – in an overall balance sheet context – to make much difference. Reining back infrastructure lending would simply not move the needle when it comes to capital adequacy, so why bother?
However, there is a twist in the tail. While Dinham paints a picture of a very busy ING in an infrastructure lending context, he is no fan of long loan tenors, believing they do not offer an appropriate alignment of interest between bank and client. And it’s in this area of long-term financing where he believes institutional investors have a big role to play – and where he also thinks they are failing to take advantage of the opportunity due to misconceptions.
And what are those misconceptions? The May 2012 issue of Infrastructure Investor, featuring our full-length interview with Dinham, will provide the answers.