What is the future for infrastructure financing?
A changed landscape post credit crunch
Risk returned to the world of finance with the onset of the global financial crises (GFC). Infrastructure suffered together with all sectors. Today we continue to be afflicted with uncertainty about the future direction of the infrastructure and project finance (I&PF) markets. Concerns remain about depth of markets, long debt tenors, absence of syndication markets, liquidity pressures, refinancing risk, counter-party risk and so on.
While many governments stepped in to support the I&PF markets with cash and/or guarantees, this support is no longer sustainable due to the significant deficits and sovereign debt levels in developed countries. Furthermore the infrastructure stimulus packages will understandably reverse as governments look to bring their finances under control. The re-emergence of sovereign credit risk as a factor in developed markets is another feature of the post GFC world.
The regulatory landscape will continue to evolve as Basle 3 works its way through the I&PF finance markets. The regulations are likely to increase the price and reduce the supply of long term debt.
Mutlilaterals, state owned infrastructure banks and ECAs will continue to play an important role in the provision of project finance to infrastructure projects in both developed and developing countries.
Despite the difficult markets, equity infrastructure funds will succeed in raising new money as the insatiable demand for lower-risk returns provided by infrastructure continue to attract long term pension fund and other institutional investors. Specialist funds may arise while pension funds and sovereign wealth funds will increasingly look to take direct stakes in infrastructure projects and companies.
The key challenge for the I&PF debt markets remains attracting institutional pension fund money. While pre GFC institutional money was invested directly into projects with monoline credit enhancement or helped relieve banks’ balance sheets through CDOs/CLOs, these structures are no longer a realistic option. Large I&PF portfolio debt sales by banks to institutions will continue, however, all market participants will continue to try to create multi-investor institutional I&PF debt funds or find structured products that de-risk senior debt. The capital debt markets need to be the prime source for I&PF refinancing rather than relying on the rollover of bank debt.
