Charles Hardeman, an Associate Consultant of GDP Global, is also CEO of Santerre Ltd. (
Most analysts believe that the credit crunch is likely to be with us through 2008 at least, and, as a result, project finance lenders for infrastructure developments, including Public Private Partnership (PPP) deals, are assessing which sectors are suitable for their attention. Not surprisingly in this environment, project bankers want to see infrastructure financing structures that exhibit a combination of low risk and high margins which afford a good probability of approval from their credit committees.
Although the debt markets remain open for well structured infrastructure development and PPP deals, new pricing levels are in play and margins might be up by 50bp at the lower risk end of the spectrum, but increase to 200bp –and higher– for riskier deals, ….if they go forward at all.
Government agencies involved in the public private financing of infrastructure, including new economic zone developments, port expansions, energy & power facilities, transportation networks and other public infrastructure projects, should be aware that things have changed. Expect the cost of finance to rise, tighter criteria on the assessment of risk, added creditor protections, emphasis on the need for stable cash flows, a monopoly position in the market, more conservative provisions for future repair / restoration of assets and a general emphasis on the quality of the project , all of which will require flexibility on the part of the public sector in negotiating new infrastructure development deals with the private sector.
Tom Hardy, global head of project finance at Royal Bank of Scotland, which tops the project finance lead arranging tables, has stated that “Economic Recovery will start at the earliest next year if GDP output shows signs of sustained growth. But even with such evidence, banks will be nervous and are unlikely to commence significant expansion of their lending activities. In such a scenario, project margins could yet go higher and in particular if the current liquidity and capital challenges were to be exacerbated by the credit crunch”
The biggest price increases will apply to hybrid financings that are a blend of project debt and aggressive acquisition finance structures that allow sponsors to acquire infrastructure assets at high debt multiples. Some of the most significant credit risks to the infrastructure sector were contained in these hybrid deals throughout 2006 and early 2007, and lenders today must be very well rewarded and protected or they will walk away from these structures. Of major concern is that Standard & Poors has gone on record to warn that the use of hybrid financing techniques is undermining infrastructure’s reputation for strong, stable credit quality. The poor performance of Eurotunnel, as well as Metronet Rail BVC Finance PLC and Metronet Rail SSL Finance PLC, the U.K. based PPP rail infrastructure companies, highlight this concern.
In addition to the impact that the credit markets have on public private infrastructure, governments should be aware that sustained high oil prices will adversely impact on the feasibility of most concession type deals, especially toll road and airport developments. “The sort of event we are now seeing, with high oil and petrol prices, illustrates why one needs to apply caution to initial forecasts with projects such as toll roads, but does not mean that we have to radically change the downside sensitivities that we have been considering anyway”, comments a senior analyst at ratings agency Moody’s in London.
In summary, project debt financing markets generally remain open, but there are major challenges still facing individual lenders, and the terms for new debt pricing levels on PPP and other infrastructure related financings, as well as overall lending appetite, may not be reasonably apparent until later in the year.
It is clear, however, that debt providers are returning to infrastructure financing structures that are governed by more conservative lending conditions as the global credit crunch ushers back a welcomed discipline into the market.
