While other global banks have pulled back from this asset class – one that has often proved to carry equity-style risk with debt-style returns and is set to be hit by high new capital standards under Basle II – Citigroup remains pre-eminent. According to Dealogic Projectware, in the past year it was the leading arranger of project loans, the leading bookrunner of project bonds and the leading adviser to project deals.
Problem loans to the once-vibrant US power sector and in telecoms-related projects have caused some banks to re-examine the risks and returns of project assets and their ability to distribute them. It’s a particular problem for banks that specialize in one region or a few sectors and whose distribution capacity is exposed to a drying up of demand in any regional bank market.
But Citigroup’s reach and breadth of business gives it some protection from a downturn in any region, industry sector or type of project.
For example, it sees infrastructure financing, rather than power, becoming a mainstay now in developed markets, notably Europe. This should compensate for falling volumes elsewhere.
And there are other hedges against business cycles built into its approach to project finance. Anne Costin, deputy head of global project and structured trade finance, says: “Our strategy of focusing on official agency enhancements bodes well in more difficult market scenarios like what is facing lots of projects in emerging markets today. Some of today’s projects would not get done without the risk mitigation afforded by the use of ECAs and multilaterals. Also, we use our bankers’ structuring skills across industry lines and geographies. This way we are able to re-deploy bankers from cold to hot industry sectors and regions periodically to meet market demand.”
So last November, for example, it completed a $147 million six-year loan for Telkomsel in Indonesia to finance the build-out of the country-wide GSM network. Crucial to the deal, for which Citigroup acted as financial adviser and sole lead arranger, was support from Hermes of Germany and EKN of Sweden (Siemens and Ericsson were suppliers). “Not very long ago, no bank thought this was doable since these ECAs usually require a sovereign guarantee for the country of Indonesia”, says Costin.
Another example is the $1.1 billion financing for Nigeria LNG closed last December: the largest ever financing for a Nigerian borrower and the largest non-recourse financing in sub-Saharan Africa. It drew on support from various export credit agencies – USExim, SACE and others – and the African Development Bank.
Another growing component of Citigroup’s project business is local-currency financing. Costin says: “We look across the board for the most optimal sources of capital for projects. Local currency financing in the emerging markets should continue to increase, as a natural hedge against currency devaluations. We have done local currency financings in Brazil, China, India, Jamaica, Kenya, Algeria, Malaysia, Peru, the Philippines, Indonesia, South Africa, Thailand, and Venezuela.”
One groundbreaking transaction completed last September was the $1.04 billion equivalent financing for BASF-YPC in China to construct nine ethylene cracker plants. This was divided into US dollar and local renminbi term loans and working capital facilities. Common terms of agreement between international and Chinese banks enabled a milestone import substitution project in a so-called pillar industry.
Citigroup has used its project finance skills to open up new markets. This March it acted as financial adviser and sole lead arranger on a $156 million loan to Algerian Cement Company to finance the building of a dry-process cement plant in M’Sila. This included support from the European Investment Bank and International Finance Corporation as well as Danish export credit agency, EKF. Not only was it the first ever limited recourse financing in Algeria, it was the first private-sector financing by an Algerian borrower.
In developed markets too Citigroup is the bank to turn to for big, complex deals. It was the joint mandated lead arranger and financial adviser to the UK government on the £9 billion ($14 billion) bridge facility for Network Rail’s acquisition of Railtrack, a key deal in reforming the UK rail sector after Railtrack went into default.
And even in a tough year for power projects, Citigroup executed a $430 million non-recourse leveraged lease financing for a coal-fired generation facility at Choctaw in Mississippi, supported by a power purchase agreement from the Tennessee Valley Authority.
