Funding Public Private Partnerships November 2014
OVERVIEW CURRENT INFRASTRUCTURE DEBT MARKETS � UK and EUROPE � AMERICA � � AUSTRALIA AUSTRALIA � INDIA � SOUTH AFRICA CRITICAL RISKS AND MAIN CHALLENGES RAISING THE CAPACITY OF LOCAL FUNDING MARKETS 07/11/2014 1
CURRENT MARKET DEVELOPMENTS CURRENT MARKET DEVELOPMENTS
THE UK AND EUROPEAN PPP MARKET � Project structure ● Project company retains limited risk. ● Not much flexibility once structure has been finalised ● Very limited recourse to project sponsors � Typical financing structure ● Long dated debt covering the whole concession term, typically up to 29 years. ● Floating rate debt fully hedged as fixed interest rate or inflation linked ● High leverage of around 90% ● Tight cover ratios of c. 1.18 to 1.20x ● Tight cover ratios of c. 1.18 to 1.20x ● Credit margins of c.1.5% ● Margin step down after construction completion. ● French PPP projects usually include a substantial tranche of government guaranteed debt – ‘Cession Dailly’ � Sources of funds ● Major European and international banks ● Non bank financial institutions starting to enter the market ● Specialist infrastructure debt funds being established ● European Investment Bank supports strategic projects ● Limited use of project bonds. 07/11/2014 3
THE AMERICAN PPP MARKET � Project structure ● Project company retains limited risk. ● Not much flexibility once structure has been finalised ● Very limited recourse to project sponsors ● Additional support or structuring around the construction risk to achieve an investment grade credit rating � Typical financing structure ● Long dated debt covering the whole concession term, typically up to or even in excess of 30 years. ● Fixed interest rate tax exempt bonds, mainly Private Activity Bonds (PABs) ● Also have the TIFIA, US government loan program, which provides low cost long term loans to some transactions. ● Also have the TIFIA, US government loan program, which provides low cost long term loans to some transactions. ● High leverage of around 90% ● Tight cover ratios of c. 1.20x ● Credit margins of c.1.5% � Sources of funds ● Liquid and deep bond markets ● Financial institutions and sophisticated bond investors ● Limited use of bank debt, usually shorter dated repaid by milestone payments. 07/11/2014 4
THE AUSTRALIAN PPP MARKET � Project structure ● Project company retains limited risk. ● Not much flexibility once structure has been finalised ● Very limited recourse to project sponsors � Typical financing structure ● Short to medium dated debt requiring a number of refinancings over the project life. ● Debt tenors usually in the 3 to 7 year range, occasionally 10 years ● Floating interest rate loans hedged into fixed interest rate for the term of the debt ● Public sector shares refinancing risk by adjusting payments for movements in underlying reference rate, but not credit margin ● Public sector shares refinancing risk by adjusting payments for movements in underlying reference rate, but not credit margin ● High leverage of around 90% ● Tight cover ratios of c. 1.20x ● Credit margins of c.1.8% � Sources of funds ● Australian banks and international banks active in that market ● Refinancings starting to access the US Private Placement market to access long dated funding in conjunction with cross currency swaps. 07/11/2014 5
THE INDIAN PPP MARKET � Project structure ● Project company retains a significant level risk. ● Structures generally very lose with some ongoing flexibility once structure has been finalised ● Generally strong support from sponsors to cover key elements of risk � Typical financing structure ● Medium dated debt with a small bullet repayment at maturity. ● Debt tenors usually in the 10 to 15 year range ● Floating interest rate loans linked to each individual banks reference rate ● Limited interest rate swap market and no common reference rate ● Limited interest rate swap market and no common reference rate ● Public sector shares refinancing risk by adjusting payments for movements in underlying reference rate, but not credit margin ● Relatively low leverage of around 80% ● Usually an extended tail of c.5 years after loan maturity ● Cover ratios of c. 1.30x ● Credit margins in the 1.75% to 3% range � Sources of funds ● Indian banks and particularly the main State owned banks ● Major banks starting to be concerned about sector concentration risk, particularly in the power and roads sectors ● Sponsors starting to explore the use of international bank financing, but managing the currency risk is an issue 07/11/2014 6
THE SOUTH AFRICAN PPP MARKET � Project structure ● Largely follows the European approach ● Project company retains limited risk. ● Not much flexibility once structure has been finalised ● Very limited recourse to project sponsors � Typical financing structure ● Long dated debt covering the whole concession term, typically 22 to 25 years. ● Floating rate debt fully hedged as fixed interest rate or inflation linked bonds ● High leverage of around 90% for availability projects and 80% for patronage risk projects ● High leverage of around 90% for availability projects and 80% for patronage risk projects ● Tight cover ratios of c.1.20 to 1.22x for availability based projects and c.1.40x for patronage risk projects ● Credit margins of c.1.5 to 2.0% ● Margin step down after construction completion. � Sources of funds ● The largest five domestic banks all active in financing infrastructure projects. ● DBSA also active and can do longer tenors. ● Non bank financial institutions have strong appetite for inflation linked bonds. ● European Investment Bank can provide cheap ZAR funding but requires a project risk guarantee from the local banks. 07/11/2014 7
CONCLUSIONS AND CHALLENGES � Sponsors in all markets are incentivised to access the cheapest most efficient funding source available ● Generally the most efficient source of funding is the local bank market with large savings deposits in the local currency. ● International banks only really get competitive when it comes to providing hard currency funding, usually USD. ● The USA has the most liquid and sophisticated bond market in the world and has tax advantaged products available to fund infrastructure. ● Domestic bond markets in other countries are not that developed and have little appetite for long dated illiquid project bonds. ● Emerging countries do not generally have liquid long dated swaps markets. � Funding markets were initially severely impacted by the GFC in 2008, but have now largely recovered ● Structures are getting back to where they were before the GFC in most markets. ● Risk margins on average are still higher, but so are bank’s liquidity costs. ● Risk margins on average are still higher, but so are bank’s liquidity costs. ● European banks are again providing long dated maturities but the Australian banks are still sticking to mini perm structures. ● The monoline insurance market for wrapped project bonds has not been re-established and probably never return. ● Revenue risk projects, particularly greenfield toll roads, have become very challenging and un-bankable in certain markets. � The UK infrastructure market – value for money drive ● The UK PFI market was particularly reliant on the monoline wrapped bond funding prior to the GFC. ● Perceived shortage of competitively priced debt following the demise of the monoline insurers. ● Long term bank debt increased in cost and was generally less available. ● Government did not believe that short term bank debt (mini perms with the inherent refinancing) offered value for money. ● The UK and EIB guarantee schemes are aimed at reducing the cost of funding rather than addressing a lack of available funding. 07/11/2014 8
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