Building the blocks of a new era in project finance
There’s a problem in project finance. Banks no longer want to hold assets. Governments want to launch huge infrastructure projects. Can traditional asset managers and pension funds, which like the risk/reward profile of infrastructure, fill the gap?
Project financing is a stark example of a market where high risk-weighted charges and the high cost of long-dated liabilities are leading to a reduction in banks’ appetite to provide financing.
As in lending to small and medium-sized enterprises (SMEs), where policymakers are badgering banks to keep lending even while announcing new capital and liquidity requirements that make it hard for them to do so, project and infrastructure finance increasingly looks central to efforts to kick-start stalled economies. And as with SME lending, it looks as if institutional investors and asset managers will have to pick up the slack from the banks.
At the end of June, Bank of Ireland offered a clue as to the way forward for project and infrastructure finance when it disclosed an agreement to sell a portfolio of UK loans, with total drawn and undrawn commitments of circa €270 million, to the Danish pension fund PensionDanmark. The pension fund picked up the portfolio at an attractive discount, at a price around 83.5% of these commitments’ face value, which should bring a decent yield.
The next stop for long-term real-money investors after buying up seasoned portfolios from forced sellers is to position themselves as the source of new funding.