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Hitting the refinancing wall

A large number of infrastructure companies and projects will need to refinance their debt in the next couple of years, and this “refinancing wall” is likely to have a negative impact on investment in new build schemes.

Many readers of NCE may be forgiven for thinking it is business back to normal for the banks, what with the return to the mega-bonuses.

However, while bankers’ pay-packets may be bulging, do not be fooled in to thinking that that the amount of debt released by banks to finance infrastructure will also suddenly to return to pre-recession levels.

Some new projects will of course be financed, especially large projects, with strong sponsors, that require large amounts of debt. These projects are very attractive to infrastructure financiers, as their scale means banks can take large ‘tickets’  (i.e. large loan commitments, either on their own or as part of a group of lenders). 

The bigger the ticket, the larger the return for the bank. The greater the number of big ticket transactions a bank is able to complete, the fewer overall number of transactions an infrastructure team in a bank has to make to meet its debt allocation and, as there are set costs with each transaction, this makes their department more profitable.

Backing brownfield

However, what is even more preferable to banks than large greenfield projects are projects that are already operational and require investment. One only needs to look a the strong level of bank interest in the recently debt-financed acquisition of the High Speed One rail link to understand that there is nothing the banks like better than a relatively new operational asset – there is no construction risk and there is several years of operating data, so that revenues can be more accurately judged than on greenfield projects.

Unfortunately for contractors and those consultants that do not work as technical advisers to banks, there are a large number of operational assets whose debt packages are coming upfor refinancing between now and 2016, and their financing needs will undoubtedly take priority over new build schemes.

Why is this happening now, just at the time that government spending tails off and construction could really do with an injection of private finance?

In corporate finance, five-year term loans are fairly typical and the refinancing wall here refers to a large number of companies handed loans at very generous levels in 2006 and 2007, now having to renegotiate them at less preferential rates.

In project finance, term loans are typically over longer periods – 15 to 20 years - to match the long time periods it typically takes infrastructure projects to recoup their initial capital outlay for construction. However, following the Lehman Brothers crash in 2008 a great deal of projects were financed (or refinanced) on so-called ‘miniperms’ – loans with tenors of between typically just five and seven years, yet their debt repayment schedules were based on longer tenors (eg. 15 years).

This means the loans are not fully amortising and there is a lump sum to pay off, or refinance, once the miniperm’s short tenor has ended. After five years there are many projects facing the very real risk of being unable to pay off huge lump sums of debt.

Much of banks’ infrastructure teams’ time and effort over the coming two to five years will be on arranging refinancings for projects already in their loans portfolio, or on taking tickets on the refinancing of operational assets that will make welcome additions to their portfolios.

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