Infrastructure finance: A race to the bottom
In their rush to capitalize on infrastructure privatizations, lenders are pushing their risk criteria to the limit.
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.