The end of the monoline?
Investors rap MBIA over Eurotunnel payout
Even if the pipeline of PPP deals in North America does grow as expected, monolines cannot expect the business simply to land in their laps. There is now a very real competitive threat from the banks in this market, and just because the option of a capital markets exit exists doesn’t mean that it will always be used. “Normally, the willingness of the monolines to go long-term means that they are cheaper for long-term funding,” says Francisco Clemente Sánchez, chief financial officer at Cintra, which, together with Macquarie Infrastructure Group, sponsored both the Chicago Skyway and Indiana Toll Road deals. “But the banks have been pushing the envelope on tenors and prices so this is simply not the case any more.”
Last year’s $3.8 billion financing for the Indiana Toll Road has so far seen the debt remain with the lending banks rather than being securitized (the deal was lead arranged by BSCH, BBVA, BNP Paribas, Caja Madrid, Depfa, Dexia and RBS). There is some discussion in the market over the reason for this. The Chicago Skyway financing involved a $961 million Series B tranche that featured an accreting fixed-rate swap under which the project company has only limited cash payments until 2017 – it effectively pays only interest for the first 14 years of the deal. Indiana Toll Road did not include the accreting swap, but did involve a step-up swap, whereby some interest payments on the nine-year acquisition debt can be deferred until maturity.
In the case of Chicago Skyway, limited debt service on the Series B bonds will certainly have boosted the underlying rating. The securitization of the deal was out just two months after syndication closed. But there is no sign that the nine-year Indiana mini-perm financing will be securitized at all. Clemente Sánchez at Cintra is emphatic that no such exit was guaranteed. “We did not mislead the banks,” he says. “We said that there was a possibility that it would be refinanced – we stated clearly that this deal was not the same as Chicago Skyway. With Indiana we needed to see how the traffic plans pan out before any decision is made.”
Bank appetite for infrastructure assets has traditionally been structured as a five-year loan with a two-year tail. As such, long-term concession financing should still be the preserve of the monolines. “We have an embedded advatage in the infrastructure market as the guarantee runs for the life of the asset,” says Sean McCarthy, president and chief operating officer at FSA. “The banks are trying to get into this market but for any transaction larger than $300 million a capital markets execution will always win the day.”
Whether or not this will be the case for Indiana Toll Road remains to be seen, but in the meantime the banks are signed up the debt for a nine-year tenor. While some of the monolines like to suggest that – off the record – perhaps the banks were expecting that debt to be refinanced, the banks are adamant that they are happy to have taken on the risk for the nine-year term. “It is a nine-year facility and we are committed to that,” says one lender to the deal. “There is nothing in the terms of the facility that suggests that we will be repaid earlier than that.”
“I have been surprised by what the banks are prepared to lend,” says Clemente Sánchez. “During 2005 and 2006 they moved from a relatively conservative position to a much more aggressive position.” He says that while the monolines will always have a role to play in the PFI market because these structures are designed for placement into the capital markets, this is not the case elsewhere in this market. “For the rest of the project finance market the movement over the last year has been pushing the monolines into a very tight position. Given the liquidity in the market and the appetite that the banks have shown the room for the monolines has been reduced.”
In Europe, financing to back the privatization of the three French toll road operators (Sanef, APRR and ASF) went into the bank market, whereas this would have been fertile monoline territory in the past. There were particular problems with monoline involvement in this particular case as the debt sits at the holding company level rather than the operating company level (monolines invariably attach at the operating company level as they need to be where the cash is generated). The €1.5 billion 15-year loan for Holding d’Infrastructures de Transport (Sanef’s holding company) was syndicated in October last year and attracted €2.5 billion of orders from 120 accounts. “In the case of the French motorways we could not provide an opco guarantee of holdco debt but it was not much more expensive for the borrowers to get bank debt,” says a monoline executive. “The average spread over Libor on the loans was 60bp. If it had been wrapped it would maybe have been 30bp but we would take three-quarters of that so the benefit would have been just 5bp to 8bp,” he muses. It may not be very clever of the banks to take just 60bp to lend to a holding company, but it would be almost perverse to then give up half of this meagre spread for insurance against the very risk they are trying to take.
Despite the willingness of the banks to lend, the monolines maintain that they retain the upper hand in this market. “Monolines are infrastructure-oriented animals – it is a natural business for them,” says Tim Travers, senior managing director and head of international business at FGIC. “With infrastructure assets there comes a point where you simply cannot lever it up any more and still achieve investment grade ratings.” And there is a degree of wait-and-see complacency over the bank market’s enthusiasm for this sector. “Indiana Toll Road was a high watermark not to be repeated,” sniffs one monoline veteran. Indeed, there is a degree of Schadenfreude from the monolines over any sign that the banks have bitten off more than they can chew: The £490 million ($957 million) loan to back the AIG-led consortium’s acquisition of London City Airport is a case in point. The market was awash with rumours that the deal was struggling in syndication due to the £750 million price that was paid for the airport, but the seven-year deal was eventually successfully syndicated by leads RBS and Credit Suisse in December.
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