Abstract
Project finance is the funding solution that financial markets have developed to convey private capital to infrastructure investments. In this chapter, we first analyze the key characteristics of this structured finance transaction, pointing out the main ways it differs from corporate finance and the benefits it offers to sponsors and lenders. We then look at the market trends at a global and European level, indicating how the market has evolved in the past few years. As a final point, we focus on how capital markets providing debt to infrastructure have changed in response to the financial crisis and the drop in interest rates. What we’ll discover is that the project finance market, once firmly under control of banks, is becoming an area of cooperation between banks and long term institutional investors. The entrance of new actors in the market of structured finance for infrastructure poses critical questions for regulators, who have to strike the right balance between the need to push private investment in infrastructure and to maintain financial market stability.
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Notes
- 1.
Intuitively, the financial soundness of the parties involved in a project finance initiative should have a significant effect on the pricing of the transaction. However, there is very little evidence of this. Dailami and Hauswald (2007) found a strong negative correlation between the existence of a take-or-pay agreement (namely, long-term unconditional purchase contracts signed by a large buyer/offtaker) with sound counterparts and spreads set above leading rates for the issue of project bonds. Furthermore, the authors demonstrated a strong correlation between project bond pricing and the rating trend, and the product or service purchaser’s financial situation. Similar results are shown by Bonetti et al. (2010) and Corielli et al. (2010) who demonstrate that when there are sponsors who also play the role of key counterparties of the SPV, this has beneficial effects on the loan spread and the Debt/Equity ratio of the initiative.
- 2.
Megginson and Kleimeier (2000) empirically show a modest difference between pricing (measuring the spread above interbank base rates) for project loans and syndicated corporate loans. This, according to the authors, is because a project finance transaction isn’t necessarily riskier than a corporate-financed project if the underlying contracts constitute a valid mitigant for the financers’ credit risk. In any case, the cost of structuring the deal in project finance form, if measured in terms of upfront fees paid, is relevant. Esty (2004) indicates an average of 5–10% of the total investment cost is paid for advisory fees to the different professionals who participate in the transaction.
- 3.
The Special Purpose Vehicle’s indebtedness has a real effect on sponsors when accounts are consolidated. The consolidated financial statements will actually show an increase in indebtedness as a result of the debt of the subsidiary vehicle company. If, however, financing granted by the creditor is on a company basis, not a consolidated basis, then the off-balance sheet financing fully achieves its aim.
- 4.
Regarding insurance coverage, lenders require the SPV to undersign insurance policies against a number of risks identified by an insurance broker as a condition precedent for any debt drawdown. The different insurance products available on the market (Gatti 2012) are coordinated and linked to the project’s contractual structure via an OPIC (Owner Controlled Insurance Programme) (Cottone and De Rocco 2016).
- 5.
Recent examples of investments in telecom towers in some Sub-Saharan countries by infrastructure private equity funds are clear examples of projects belonging to Segment IV (Blas 2014).
- 6.
Data referred to in this section are taken from Dealogic’s ProjectWare database and include both new initiatives and the refinancing of previously syndicated transactions on a project finance basis. Recourse to this type of data must be weighed carefully because of the limitations of the databases themselves. More precisely, transactions recorded in ProjectWare don’t cover the entire universe of project finance transactions assembled in any one year or in a certain country, given that input to the databases is provided by advisers or arrangers themselves. Normally this means data concerning the majority of smaller projects assembled at a local level (and probably not even syndicated) are not captured as they are structured directly by the promoting bank. This limitation becomes even more critical in more detailed surveys pertaining to an individual country or geographical area.
- 7.
Mini-perm loans are typically characterized by a bullet payment for the total or partial amount of the principal. Such a loan would be used to finance the construction phase but must be repaid only after a short period of time during the construction phase, forcing the SPV to refinance the loan, exposing it to refinancing risk.
- 8.
An examples of the partnership model is the relationship between the French Bank Natixis and Belgian Insurance Company Ageas. A similar structure characterizes the partnership between Crédit Agricole and Crédit Agricole Assurances (Gatti 2014).
- 9.
Examples of the debt fund model are the European Infrastructure Debt Platform created by Blackrock with a focus on Germany, France, the UK and Benelux countries, the Senior European Loan Fund originated by Natixis AM, the senior debt fund dedicated to property lending launched by M&G (Prudential), and the recent debt fund dedicated to European Infrastructure launched by Allianz Global Investors.
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Gatti, S. (2017). Project Finance. In: Caselli, S., Gatti, S. (eds) Structured Finance. Springer, Cham. https://doi.org/10.1007/978-3-319-54124-2_3
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