A review of 2014’s project finance developments

What next for the project finance sector? Mark Richards, partner at Berwin Leighton Paisner, says 2014 has been an interesting year but, looking forward, there will be continued senior debt and equity pricing pressure as deal flow will continue to be constrained.

Has 2014 been a good year for project finance?

It has been an interesting year for project finance in 2014. We have seen increasing amounts of commercial bank liquidity in the project finance market and some established institutions that previously left the project finance market making a re-entry into the market. We have also seen an increase in headcount in the institutional insurance/pension fund credit providers with a number hiring to expand their teams. So we’ve seen a lot of competition in the provision of senior debt in the UK and wider developed European markets.

This increased competition and increased supply of capital is to be matched by the number of new greenfield projects entering the market, especially public–private partnerships (PPPs). While there are a number of renewable energy generation project developments coming to market (onshore wind, offshore wind, offshore transmission owners (OFTOs), ground mounted solar generation, biomass/merchant waste projects) there is a lack of PPP deals in the social infrastructure and transportation sectors.

Have you seen any trends emerging in project finance this year?

The main trends are:

  • greater senior debt and infrastructure debt liquidity
  • fewer social infrastructure and transport PPPs
  • greater competition for senior debt terms, impacting in lower pricing and, in some instances, increasing tenors

What have been the main challenges for project sponsors and/or lenders?

  • lack of a pipeline of available deals, especially in PPP sectors
  • significant regulatory changes creating some uncertainty (eg UK energy market reforms involving creation of contracts for difference and capacity payments and a new regime for payment for power asset development and generation)
  • perception by investors of the risk of political interference/lack of stability to allow long-term infrastructure growth

Are there any jurisdictions which have been particularly active?

  • Belgium and the Netherlands
  • Germany
  • Canada
  • US
  • Asia (particularly Indonesia and Philippines)
  • Scotland
  • Turkey

What does 2015 have in store for project finance?

The outlook for 2015 is:

  • continued senior debt and equity pricing pressure as deal flow continues to be constrained
  • delays in investment linked to regulatory uncertainty (eg in the UK energy market the new regime may cause delays as investors consider and price the impact of changes)
  • limited number of transport/social infrastructure PPPs in developed economies
  • greater involvement of devolved/municipalities in PPPs and project finance deals—city-led infrastructure rather than central infrastructure
  • continued involvement of governmental players (eg Green Investment Bank, UK Guarantee Scheme and wider European Investment Bank, European Bank for Reconstruction and Development, Asian Development Bank etc)
  • reduced debt fund and equity fund raising unless existing dry powder is deployed into new deals and refinancing/purchases
  • more emphasis on developing economies spending on infrastructure with support from strategic partners/governments/export credit and ‘soft’ finance
  • less greenfield development projects in established economies with greater emphasis on efficiency/productivity improvements from existing assets—finding ways for interconnectivity and efficiency to sweat existing assets rather than make large capital expenditure commitments
  • deals driven by maturing infrastructure funds—requiring assets to be sold/recycle

Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

First published on LexisPSL Banking & Finance. Click here for a free trial.

 

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