David Rose of Crossway Capital explains how a little known banking instrument, in use for 30 years in the U.S., can now be exploited by major projects worldwide
After a decade of upheaval across all capital markets, we have arrived at a point where the global project finance market is fragmented and, simply put, capital starved.
Indeed, according to the Global Infrastructure Hub: Infrastructure Outlook 2017 there is a shortfall of $3.7 trillion a year on infrastructure alone. Add to that private sector demand for project finance such as hotels, airports, senior living and other sectors and we are looking at an even higher figure. There are many ways in which banks can respond to big-ticket loan applications, not least syndicating with private equity, sovereign wealth funds and other sources of abundant private capital.
But it is a little known fact that, for thirty years, U.S. banks have been lending to major projects by acting as a conduit directly between the client and the capital markets, immune to the vagaries of traditional project financing structures.
This has been done through the Direct Pay Letter of Credit (DPLC), itself the visible part of a wider structured financing and an instrument little known outside of the U.S. but which, for three decades has been the ‘go to’ method of providing major project financing for their municipal, real estate and some corporate customers. The DPLC can augment what they are able to lend themselves so that, ifan applicant comes along with a project for a $500m hospital, the bank may only be able to directly lend, say, $50 million, but can then prepare a DPLC to cover the balance. Alternatively, the DPLC can be structured to fund the full loan amount.
The DPLC enables any tier-1, regulated bank to act as a direct conduit between the client and the U.S. capital markets providing the entire facility, or supporting what the bank can lend. Working with one of a number of specialists providing the capital market access, the DPLC is issued by the bank to the client. The bank acts as ‘middle-man’ taking a fee of, usually, one per cent for issuing the DPLC, with the funds coming direct from the capital markets. The DPLC issuing bank then collects the interest over the term of the loan, passing it back to the capital markets funders, with the term running up to thirty years.
In short, whereas a bank might have to say ‘no’ to the full $500 million loan, they can actually do direct lending business of $50 million, and then arrange a DPLC for the client which secures them the balance. Because the funds are coming direct from the capital markets the rates are decidedly competitive. Linked to 30-day LIBOR, the client is receiving long term funding at short term rates. It is possible for the DPLC issuing bank to add a margin to the offered rate, which is managed within the DPLC structure.
Until now, there has been nowhere to go to find out how this overlooked banking instrument can be exploited by the world outside of the U.S. But, by integrating DPLC into a complete project financing program, a way has now been developed so that operations can be structured for banks worldwide, and not just in the U.S., to access those capital markets for their customers through issuing their own DPLC’s. Bringing the potential to release up to $350 billion a year into the global project financing market.
This specialist funder has developed a structure which involves wrapping every aspect of the project in pro-forma insurance policies. These are then tailored to each individual aspect of each project, rather than just using generic cover from contractors. The policies are created and issued by a long-established Lloyds of London underwriting syndicate, essentially endowing the project with the Lloyds A/AA rating making it acceptable to the capital markets.
The minimum deal value is usually $100 million with some transactions running to upwards of $10 billion. For instance, if the project is a $1 billion utility scale solar farm the insurance wrap would cover access to land, political and country risk, engineering, procurement and construction (EPC) contractor performance, manufacture and delivery of the solar panels, the off-take agreement and many other aspects. With these wraps in place, and the project consequently now carrying the Lloyds A/AA rating, the DPLC can be created with the client’s bank. Essentially the structure, which is G-10 central bank and Basel Accord compliant, creates a fully de-risked project that is entirely acceptable to the capital markets.
Bringing the DPLC out of the U.S. and onto the global stage took a little more than the simplistic presentation in this article. The DPLChad to be integrated into a project financing package and this has been achieved by Sydney-based Crossway Capital. They, working with a London-based capital markets specialist and the Lloyds of London syndicate have developed the Insurance Wrapped Project Finance (IWPF) program. This takes the client through the initial intake and approval, then production of the insurance wraps to the offer of funding direct from the capital markets specialist.
When an applicant for IWPF financing is approved, the client will need to involve their bank from the outset. The onus then rests squarely on the client’s bank to work with the capital markets specialist to structure and issue the DPLC for the client. Thus enabling the bank to provide the funding direct to their own customer.
Throughout the thirty years it has been operating in the U.S. the only reason the DPLC has not made inroads into the rest of the world is the lack of understanding about how it works. Now, through IWPF, it can be the ‘go to’ project finance tool for banks and their clients worldwide.
Wall Street bounce, upbeat earnings lift European stocks
By Amal S and Sruthi Shankar
(Reuters) – European stocks rose on Wednesday after Dutch chip equipment maker ASML and Swiss luxury group Richemont gave encouraging earnings updates, while investors hoped for a large U.S. stimulus plan as Joe Biden was sworn in as president.
The pan-European STOXX 600 index closed 0.7% higher, getting an extra boost as Wall Street marked record highs.
All eyes were on Biden’s inauguration as the 46th U.S. President, with traders betting on a bigger pandemic relief plan and higher infrastructure spending under the new administration to boost the pandemic-stricken economy.
Tech stocks rallied to a two-decade peak in Europe after ASML Holding NV rose 3.0% to all-time highs on better-than-expected quarterly sales and a strong order intake for 2021.
Meanwhile, Richemont rose 2.8%, after posting a 5% increase in quarterly sales as Chinese splashed out on Cartier, its flagship jewellery brand.
Britain’s Burberry jumped 3.9% after it stuck to its full-year goals, saying higher full-price sales would boost annual margins, while Asian demand remained strong.
The pair boosted European luxury goods makers that are heavily reliant on China, with LVMH and Kering gaining between 1% and 3%.
“Any sign that retail spending is picking up in China is going to be a boost to the Western markets and those heavily exposed to it,” said Connor Campbell, financial analyst at SpreadEx.
The European Central Bank is set to meet on Thursday. While no policy changes are expected, the bank could face more questions about an increasingly challenging outlook only a month after it unleashed fresh stimulus to bolster the euro zone economy.
“With the new round of easing measures fully in place and no new forecasts to be presented tomorrow, it should be a fairly uneventful day for the euro,” ING analysts said in a note.
Italy’s FTSE MIB gained 0.9% and lenders rose 1.6% after Prime Minister Giuseppe Conte won a confidence vote in the upper house Senate and averted a government collapse.
Conte narrowly secured the vote on Tuesday, allowing him to remain in office after a junior partner quit his coalition last week in the midst of the COVID-19 pandemic.
Daimler AG jumped 4.2% after its Mercedes-Benz brand unveiled a new electric compact SUV, the EQA, as part of plans to take on rival Tesla Inc.
Germany’s Hugo Boss added 4.4% after Mike Ashley-led Frasers said it boosted its stake in the company.
(Reporting by Sruthi Shankar and Amal S in Bengaluru; Editing by Shailesh Kuber and Arun Koyyur and Kirsten Donovan)
Miners lead FTSE 100 higher on earnings cheer
By Shivani Kumaresan
(Reuters) – UK’s FTSE 100 rose on Wednesday as miners gained after a strong production forecast from BHP Group, while encouraging updates from luxury brand Burberry and education group Pearson drove optimism about the earnings season.
BHP Group Ltd climbed 2.8% after it forecast record iron ore production for fiscal 2021, helped by high prices for the commodity. Other miners Rio Tinto, Anglo American and Glencore rose more than 2%.
Global markets rallied in anticipation of more fiscal spending as Joe Biden prepared to take charge as the 46th U.S. president.
“There is a view in the markets that more spending is in the pipeline, after all, Mr Biden will want to start his presidency on a positive note,” said David Madden, market analyst at CMC Markets UK.
The FTSE 100 index rose 0.4% and the domestically focussed FTSE 250 index added 1.4%.
The FTSE 100 has recorded consistent monthly gains since November after the sealing of a Brexit trade deal and hopes of a vaccine-led economic recovery, but has recently lost steam as tighter business restrictions sparked fears of a slow rebound.
Burberry rose 3.9% as it stuck to its full-year goals and said higher full-price sales would boost annual margins and Asian demand remained strong.
Global education group Pearson jumped 8.6% after its global online sales grew 18% in 2020, helped by strong enrolments in virtual schools.
WH Smith Plc surged 10.4% to the top of the FTSE 250 index as its trading during Christmas was ahead of its expectations.
(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V, William Maclean)
What we can expect from currencies and markets in 2021
By Jeremy Thomson-Cook, Chief Economist at money management specialist Equals Money, part of the Equals Group.
2020 was a year that changed almost every aspect of our lives, and currency markets across the world reacted with volatility. Complacency, panic, and isolation have influenced activity over the last 12 months and most recently, a semblance of hope has been seen as vaccines offer the first glimpse of a ‘way out’.
While 2021 will hopefully see us on the road to recovery, we’re certain to be dealing with the longer-term economic effects of the pandemic for years to come, while also navigating a post-Brexit outlook. So, what can we expect from currencies and markets in 2021?
A focus on recovery
Once the impact of mass-vaccination starts to be seen across the world, we expect to see a huge focus on recovery this year.
Investors are expected to move away from considering the US dollar and wider developed markets as the best place for their money, with an increased interest in emerging markets. Commodity prices are likely to remain high as demand recovers and the global supply chain gains pace due to growing confidence from consumers to spend their cash.
Successful logistics will play a pivotal role on the road to recovery, with the ability of governments to both reliably and speedily vaccinate the population while driving the global economy from a trade point of view, essential for success.
All this is underpinned by the assumption that interest rates will remaining at ultra-low levels throughout this year, and in certain cases, longer still.
When it comes to sector-specific recovery, the travel, airline, and leisure industries are expected to make a strong comeback when restrictions ease as consumers look to make up for lost time.
By contrast, commercial property and real estate are likely to face challenges as businesses revaluate how they use office space after nearly a year of successful remote working. This struggle will also be reflected by the increasing amount of empty retail space on British highstreets after the sector, and some of Britain’s most established brands, were hit hard in 2020.
What will we see from currencies across the globe?
The pound is reacting to a UK economy still very much in the grips of a pandemic, with strict lockdown measures likely to be in place until at least March. Add to that a new relationship with the European Union, and we’re likely to see the pound underperform in 2021, particularly against the euro.
Politics is likely to have less sway over sterling in 2021, with the exception of the upcoming elections in Scotland which are likely to raise the chances of another Sottish referendum on independence.
Despite the expectation that the pound will have a modest year, we do expect to see it move higher against the US dollar in the coming months.
All signs point to a strong start for the euro, and we expect it will continue the strength it showed at the end of 2020 for the months to come. Its counterparts in Scandinavia (NOK, SEK) and in Central and Eastern Europe (PLN, HUF) may even outperform the single currency as the Eurozone recovery outpaces the US and UK’s.
Markets are pleased that the Eurozone has managed to come together during a time of crisis and offer businesses and consumers both fiscal and monetary policy support. The political agenda looks a lot quieter for 2021, and this lack of political pressure coupled with a central bank that has shown its strength through the Pandemic Emergency Purchase Program, means sovereign risk is very low.
The US dollar is likely to remain weak as investors who have bought into the dollar during Trump’s tenure in the White House react to the transition to a Biden Administration – a change that is likely to normalise global trade and expand spending.
US businesses have struggled with international relations under the watch of a Trump administration and a calmer stewardship of trade should help to boost corporate profits in the coming months, allowing for further USD depreciation.
If the UK, Asia or the Eurozone are able to move forward with their pandemic recovery faster than the US, we expect the dollar to lag against both GBP and EUR, as well as other emerging currencies – the Chinese yuan, Russian ruble and Indonesian rupiah – in 2021.
The Japanese yen has acted as a safe haven from negative investment sentiment throughout the Covid-19 pandemic, and arguably long before that, pushing higher against other currencies in 2020.
While the yen would typically be sold off by investors in favour of more attractive investments, the overall outlook becomes more positive as it continues to show strength as we enter 2021. This could be down to the strange markets that we are currently navigating; vaccine joy tempered by very real near-term pandemic problems. Investors may also be positioning themselves for a wider retreat in the US dollar (USD).
Whilst the Japanese yen may enjoy some strength against the USD in the coming year and remains one to watch, we expect it to slip on a broader basis.
The Australian dollar has acted as a poster child for the recovery in risk assets since the early days of the pandemic, and its likely to remain ahead of its counterparts for the early part of the year.
Australia’s handling of the pandemic to date gives it an advantage over the likes of the UK and US, and as it enters the summer months with a vaccine rollout all but underway, the outlook is positive.
If market minds are focused on a recovery then we will be looking for a higher AUD, and it is not out of the realms of possibility that it could outperform the majority of the G10.
If 2020 taught us anything, it’s that nothing’s set in stone and as we start the new year in another lockdown, it looks like that’s set to continue for 2021. Either way, we’ll see the uncertainty of the world we live in continue to be reflected in the market and currency activity across the globe.
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