Awards for Excellence 2007: Best Project Finance House


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RBS’s activities continue to demonstrate the advantages of project finance structures versus ever-growing competition from other forms of funding.

RBS abandons project finance 
Friday, February 27, 2009

Also shortlisted in this category:
Mizuho Bank

Awards for Excellence

Royal Bank of Scotland

One thing a project finance banker needs to be is flexible. Growing competitive pressure from leveraged finance, capital markets and aggressive infrastructure funds mean that the rules of the game are changing – fast. Royal Bank of Scotland, Euromoney’s global project finance house for 2007, is well aware of this. "The definition of infrastructure is changing," says Phil Hall, head of origination for infrastructure finance. "We are working alongside our corporate and leveraged finance teams more and more – the edges between these departments are increasingly blurred."

Global project finance reached $221 billion in 2006 – a record volume. This business was split fairly evenly between western Europe, Asia-Pacific, the Middle East and north America, with north America achieving the fastest rate of growth: up from a 16% market share to 20%. The potential of this market is vast and RBS is enviably well positioned to take advantage of this. "Infrastructure projects in the US are still the preserve of the European banks from a structuring perspective," says Tom Hardy, managing director and global head of project finance and export finance at RBS.

"I have never seen such a high level of work in progress as there is now"
Tom Hardy, RBS
Tom Hardy, RBS
The bank was one of the MLAs on perhaps the most interesting infrastructure deal in the US last year, the Indiana Toll Road financing – arranged by a group of seven European houses. The $3.8 billion deal financed the first lease concession of an inter-state toll road in the US for sponsors Cintra and Macquarie Infrastructure Group. The arrangers achieved 80% leverage on the deal by using a step-up swap structure to defer some interest payments on the nine-year acquisition debt to maturity. The debt has so far not been taken out in the bond market.

"The bond markets are no longer a cheap alternative," says Hardy. "I have never seen such a high level of work in progress as there is now. Debt capital markets have not had the impact on our business over the last 12 months that many people thought that they would." Hall explains that swaps such as that used in the Indiana Toll Road deal will be used more and more, pointing to another significant deal for RBS in the past 12 months, the €1.22 billion refinancing for German autobahn service station operator Autobahn Tank & Rast. That deal involved a leveraged deal refinanced into the infrastructure market. "You have to look at the leverage that can be achieved through project finance compared with leveraged finance," notes Hall. "When these deals are done on mini-perm type structures there can be a doubling of the leverage achievable." Tank & Rast, which was acquired by Terra Firma Capital Partners in late 2004, is now on the block again and is understood to have attracted significant offers from several infrastructure funds.

Hall explains that the growing appetite of infrastructure funds at the equity level has been good news. "The growth in leverage opportunities being refinanced in the infrastructure space means that more and more assets are coming onto our balance sheet," he says. "But there has always been an embedded issue of completion risk and our structured deals can cover off that risk. Deals structured as mini-perms allow the prospect of a near-term take-out."

Other key deals for RBS include the Rugeley Power Plant deal, a £485 million ($966 million) eight-year loan to finance a 1,000MW coal-fired plant in Staffordshire. It was co-led by RBS with Calyon, HVB and ING and was the first merchant coal deal in the UK since prices collapsed in 2001/02. The £155 million eight-year debt financing for Ensus’s bioethanol plant on Teesside in March (arranged by RBS, Calyon and SG – the borrower being advised by SG) could mark the beginning of a wave of bioethanol financings in the UK.

From 2008 the Renewable Transport Fuels Obligation sets a mandatory target of 5% of transport fuels to consist of biofuels by 2010. Ensus itself is owned by Carlyle Group and Riverstone Holdings. The $1 billion Cairn Energy deal was a hybrid facility, split between a $850 million development tranche and a $150 million corporate tranche. Cairn India was listed in January this year, with Cairn retaining a 69% interest. This necessitated the migration of the debt from Cairn Energy to Cairn India, the removal of the parent guarantee and the scrapping of the corporate tranche. The deal was co-arranged with the International Finance Corporation, which committed $150 million. This was a benchmark deal, and an illustration of the flexibility that the bank market can offer when the needs of a sponsor rapidly change.