Infrastructure finance used to be so simple. Banks took on short-term bridge and construction risk; the capital markets took on long-term operational risk. Bank lending appetite for this risk was for five years with a two-year tail – anything longer than that was the preserve of the wrapped bond markets.
The prospect of more large-scale infrastructure assets being financed in the private sector has been seized upon by lending banks and capital market players as a key part of their near-term business strategies. But the infrastructure market is an unpredictable place to be – deals are very large and do not come along in an orderly fashion. The result is that there can be a small number of large, key transactions that all parties will claw each other’s eyes out to get on, and it doesn’t take a genius to figure out what the fallout from that will be.
On the lending side, sponsors report that banks have shown far more willingness to be aggressive on lending terms in the past two years. Indeed, they have shown an appetite for these assets at much lower margins and longer tenors than in even the recent past. The privatization of the French motorways involved funds being lent at an average spread of just 60 basis points over Libor and even the monoline guarantors concede that a wrapped bond issue would have struggled to be significantly cheaper. In the Indiana Toll Road PPP financing last year $4 billion was raised from the banks via acquisition, capex and liquidity facilities at between 95bp and 125bp over Libor. The expectation was that this debt would be swiftly refinanced in the capital market via a securitization – along the lines of the earlier Chicago Skyway transaction. The deal closed in June last year but so far there is no sign that a refinancing is on the cards at all – and the banks involved seem happy to take this risk on for the full nine years of the mini-perm structure.
With banks prepared to muscle into their turf, the capital markets players can only try to beat them at their own game. That means relaxing covenant terms and cutting premiums on the monoline wrap. And the guarantors will have to be prepared to become increasingly flexible – attaching at the holding company level, for example. All this is great news for the sponsors and infrastructure funds, which can have a field day playing the two sides off against each other. But it will be playing havoc with the traditional risk parameters of the two markets, and can only end in tears.
