It may not be the largest arranger of project finance deals, but CSFB has over the past 18 months proved itself to be the most innovative. Project finance as a business has been changing dramatically since 1997, and CSFB has been at the forefront.
The Asian and Russian crises in 1997 and 1998 precipitated a shakeout in the number of financial institutions prepared to take part.
Most of the Japanese houses have pulled out, or pulled back, and the departure from the business of others, such as UBS, has left fewer houses controlling larger slices of the pie at a time when banks are less likely to want to commit huge chunks of capital.
Also, the needs of many of the clients are starting to change, especially in developed markets. “The leading edge of the project finance world is characterized by more complex structures, such as merchant client construction programmes,” says Adebayo Ogunlesi, global head of project finance for CSFB.
In other words, project finance clients no longer think exclusively in terms of single project-single financing. Such deals are time-consuming, costly to arrange, and limit the company’s focus to a deal rather than a business strategy.
CSFB has engineered three responses to these changes, leading the rest of the market in doing so. First it arranged, and as sole bookrunner, on a $11 billion deal for Calpine, a US power plant corporation. Although the funding is non-recourse and of balance sheet, as with most project finance deals, it is designed to grant Calpine maximum financial flexibility for it to develop its medium-term strategy of building 12-16 power plants.
CSFB structured the deal, finalized in May 1999, as a $1 billion, four-year revolving credit facility which Calpine can tap as necessary, refinance at its discretion, and repay the loan with the proceeds. The structure has several strengths: it forgoes the need for Calpine to finance each project individually, so cutting costs; it gives the company flexibility to finance as it sees fit; recognizes that 10-, 20- and 30-year deals for projects are increasingly unrealistic as banks are unwilling to commit capital for that long (and many project finance deals get refinanced during their life-span in any case); and it even allows for a four-bank committee, representing the syndicate, to refuse funding if they are unhappy with Calpine’s plans down the road.
Second, CSFB has pioneered the collateralized loan obligation market for project finance loans. Its first, and the first ever, was concluded in early 1998, its second was launched this year. BHF-Bank contributed 26% of the assets, CSFB the rest, and it was structured as a five-tranche issue. Not only does the CLO allow CSFB to free up capital to be used more profitably, it also introduces a broader array of investors to the market at a time when the number of syndicate banks has been decreasing.
The third innovation is the private placement programme, which closed in the middle of last year. Seven institutions took part, including New York Life, MetLife, American General, Travelers, Northwestern Mutual, Teachers, and of course the programme’s originator, CSFB.
The fund holds $2.7 billion, and has already been used to sponsor five transactions worth a total of $1 billion, two in the US, two in Australia, and one in New Zealand. Again, this allows direct participation by institutional investors, but the real benefits lie elsewhere. Projects can be sponsored more quickly, and therefore more efficiently, than through the traditional syndicated loan route, or the capital markets, as the investors can commit and execute faster. It is an especially useful tool during volatile markets, when other options are limited or even closed.
Not that CSFB has avoided the traditional market at all. While not the biggest, it ranks fourth as arranger of project finance globally, and has an impressive array of deals under its belt. These include: the first limited recourse financing for a water and power project in the Gulf, a $740 million deal for the Abu Dhabi Water and Electricity company; a $472 million deal for a Latin American gas company, Compania Mega, the first Latin American plant to be sponsored after the 1998 credit crisis, and the first non-investment grade project in a non-investment grade country being sold to non-investment grade buyers to get an investment-grade rating. And at present Ogunlesi is finalizing a 15-year deal for a Nigerian project, and has secured a rating higher than that of the sovereign.
