Project Finance transactions have traditionally been underwritten by the banking sector, including development banks and multilaterals. Long tenors, high leverages, relatively constant pricing and reasonably short tails were the norm when it came to financing these transactions.
Then the financial crisis came and though the banking sector continued to be pivotal in bringing these transactions to financial close, items such as the loan tenor and maximum tickets per bank were reduced and pricing was reviewed with an increasing profile to reflect the best available conditions at the time.
More recently a new wave of investors is said to be interested in piling in, such as investment funds and pension funds, which have an interest in long term and reasonably stable cash-flows streams for their investments. Coupled with a new EU initiative, the so called "Project Bond Initiative", which has the objective of attracting "additional private finance from institutional investors", the odds may be in favor of a new set of debt funders in PPP's.
This surely is a welcome source of funding and hopefully will be beneficial for the sector.
In the last 8 years, a significant number of infrastructure projects with long useful life and concession period, like the road infrastructures, were financed through mini perm structures or amortizing financings that are not adjusted to the term and useful life of these concessions (maturity of 8 to 14 years versus a concession period of 30 years).
These concessions are now in the operation phase with major risks like construction and traffic, mitigated. In parallel some of the grantors are facing liquidity constraints and want to renegotiate the concession agreements in order to achieve a more efficient stream of payments to the various stakeholders. The emergence of new long term funding instruments with competitive pricings is welcome in achieving that goal.
Project bonds may soon be of great importance, but not without some shortcomings that must be overcome:
- project finance transactions are normally very strict and extensive on covenants and obligations, which in return demand a close monitoring and sometimes intervention of the banking syndicate during the life of the loans;
- Standard bond issues are usually fully drawn at financial close as opposed to a much more flexible drawdown schedule of the loan equivalent. That brings "negate carry" issues;
- The substantial fixed costs like the ones resulting from the need of a rating process and the minimum tickets required by the investors, require projects with significant dimension;
- Procurement processes may have to be adjusted to adapt to some characteristics of bond issues.
Some Project Bond transactions have recently reached financial close, which means that all or most of the shortcomings must have been addressed, certainly paving the way for what may be the new financing benchmark for the PPP sector.