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mai 2015

A wave of capital for infrastructure, but where are the projects ?

Publié par Andrew DAVISON | N° 479 - FINANCEMENT DE PROJETS

Senior Vice President

Infrastructure Finance

Group Moody’s


There has been a lot of noise about the large and growing requirement for infrastructure investment, which is high on the agenda of policy makers across the globe. Although there is currently substantial debt capacity available from banks and institutional investors to finance infrastructure developments in creditworthy, stable economies, there is a remarkable shortage of investment opportunities in these countries. We highlight below a number of international initiatives currently underway with the aim of bringing forward infrastructure developments, which in time could present attractive investment opportunities for the private sector.

Overview

The scale of investment required to fund foreseeable infra­structure needs across the world is vast - of the order of $60 trillion (real terms 2010) through 2030, according to McKinsey Global Institute - and some 60% greater than sums invested in infrastructure over the preceding 18 year period.

In today’s low interest rate environment, substantial long-term debt capacity is available from banks and institutional investors to finance well-structured infrastructure projects located in creditworthy, stable economies. However, access to long-term finance remains constrained where projects are located in less creditworthy countries, or face significant or speculative risks that are difficult for the private sector to quantify and mitigate.

 

Andrew DAVISON

Andrew Davison is a Senior Vice President in Moody’s Infrastructure Finance Group. His current responsibilities focus on global strategic initia­tives to help Moody’s respond to market dynamics which are reshaping financing strategies for energy and infrastructure assets, including project finance, PFI and PPP transactions. Prior to assuming his current role, Andrew had served as Team Leader for Moody’s EMEA Project Finance team since June 2007.

Andrew has a broad background in energy and infrastructure finance, and has acted variously as lead debt arranger, financial advisor and principal on a range of profile transactions in the sector, on behalf of previous employers SG, Enron and Scotia Capital. Andrew is a Chartered Accountant, and holds an engineering degree from Trinity College, Cambridge.

 

A relative lack of investment opportunities for investors



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Figure n°1 : Andrew DAVISON


seeking high quality infrastructure assets in creditworthy, stable countries has contributed to mismatches between available debt capacity and investable deal flow. We foresee a number of consequences arising from resulting competition between debt providers, including the erosion of credit quality and the potential mispricing of risk.

Several recently-launched international initiatives such as the G20’s Global Infrastructure Initiative, the European Commission’s Investment Plan for Europe, and the World Bank Group-led Global Infrastructure Facility are intended to bring forward high quality, well-structured infrastructure projects across advanced, emerging market and developing economies alike. In due course, these initiatives will provide new investment opportunities in infrastructure debt. However, given the long lead times that characterise infra­structure development it will be challenging for these initia­tives to demonstrate a meaningful impact in the near term.

A large and growing need to invest in infrastructure across the globe

Investment in infrastructure can be particularly effective in boosting economic growth, since up-front construction works contribute directly to output in an economy and newly-built infrastructure assets facilitate on-going economic activity. Over recent months the International Monetary Fund has called publicly for greater investment in infrastruc­ture, setting out a compelling rationale for infrastructure investment in advanced economies with infrastructure needs where borrowing costs are low and demand is weak, and similarly for infrastructure investment in emerging mar­ket and developing economies to address infrastructure bottlenecks.

Given the weak recovery of many advanced economies from deep recession, policy makers are concerned about a looming gap between infrastructure needs and expected infra­structure investment. Estimates of infrastructure investment requirements in key countries and regions over the period to 2020 are enormous, including $3.6 trillion (real terms 2010) in the US, $1.5 trillion in pan-European networks for transport, energy and broadband infrastructure, and $6.4 trillion (real terms 2010) in developing countries with the greatest needs arising in Asia.

However, if we consider gross fixed capital formation for non-residential construction and civil engineering as a proxy for infrastructure expenditure, it is apparent that annual infra­structure



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Figure n°2 : Exhibit 1 Gross fixed capital formation: Non-residential construction and civil engineering (% of GDP) - Note: Analysis excludes certain OECD countries for which data is not available (Chile, Israel and turkey). Data shown between 1985-1994 is partially


expenditure (as a percentage of GDP) has fallen across the OECD between 1985-2014 (see Exhibit 1 below). We estimate that this measure of annual infrastructure expenditure averaged 7.2% of GDP across the OECD between 1985-1994, declining to an average of 6.0% between 1995-2004 and declining slightly further to an average of 5.9% between 2005-2014. By 2010, average annual infra­structure expenditure across the OECD had fallen to 5.7% of GDP and has remained flat thereafter. This relatively weak level of average infrastructure expenditure across the OECD in the years following the financial crisis contrasts with the growing need for increased investment in the new-build and capital maintenance of infrastructure.

Private sector finance is available for infrastructure projects in creditworthy, stable countries

The availability of long-term finance for infrastructure investment depends on the ability of the financial system to channel sources of finance, including savings of governments, corporates and households, to where it is needed. This can be facilitated by various intermediaries such as banks and asset managers, and through transparent and competitive capital markets.

Outside of the US and Canada, banks have historically been the predominant source of long-term debt for infrastructure investment. The global financial crisis had a significant impact on the banking sector with many lenders having to absorb significant credit losses, deleverage and raise risk capital which adversely affected their ability to lend long-term. Hence outside of North America, policy makers are particularly keen to promote the development of capital mar­kets and the greater involvement of institutional investors in financing infrastructure.

Exceptionally low interest rates in a number of advanced economies has created substantial liquidity across global financial markets, which has attracted banks and institutional investors to well-structured infrastructure projects located in countries with strong credit profiles and stable and predictable legal and regulatory frameworks where political risk is low.

Many banks that had previously curtailed long-term lending to infrastructure projects and several new-entrant lenders are now targeting lending and associated ancillary income opportunities in the sector, drawn to the relatively attractive loan margins and characteristic credit strength of infrastruc­ture debt. For those banks, providing credit facilities



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Figure n°3 : Exhibit 2: The number of unlisted infrastructure debt funds and their aggregate target capital has grown rapidly since 2009 - Source: Preqin


to infra­structure projects, together with associated hedging products, advisory and agency services, is seen as an attractive use of regulatory capital despite incremental regulatory costs for long-term lending introduced by Basel III.

At the same time, many institutional investors now see rela­tive value in creditworthy infrastructure debt arising from a combination of factors, including the ability to match long-dated liabilities with long-term investments backed by long-lived infrastructure assets, attractive risk-adjusted yields and portfolio diversification benefits. Finance available from institutional investors for investment in infrastructure debt has expanded rapidly over recent years. According to Preqin, aggregate target capital of some $22.7 billion was being sought by infrastructure debt funds as at January 2015 (see Exhibit 2 below). However, this understates the amount of institutional money targeting infrastructure debt since it excludes direct investment by institutional investors. For example, in June 2013 the AXA Group announced its inten­tion to increase its exposure to infrastructure debt by EUR10 billion over the next five years, representing approximately 0.9% of the Group’s assets under management as at December 2013. However, the AXA Group is just one of several large international insurers and asset managers such as MetLife and Allianz Global Investors that are actively increasing their asset allocation to infrastructure debt. According to the OECD, institutional investors across the OECD held assets worth $92.6 trillion as at 31 December 2013. Hence, even a small fraction of a one percent increase in average asset allocation to infrastructure debt by institutional investors would represent many billions of dollars of incremental debt capacity.

We are seeing intense competition between debt providers seeking opportunities to lend to core infrastructure assets located in stable, creditworthy countries. Loan margins for the most sought-after credits, such as European Public-Private Partnership (PPP) infrastructure projects, have halved since 2012 and continue to trend down (see Exhibit 3 below).

In contrast, access to long-term debt for infrastructure projects remains constrained where projects are exposed to material country risk, or other significant or speculative risks that are difficult for the private sector to quantify and mitigate. Indeed, the European Commission’s Special Task Force on Investment in the EU reported in December 2014 that more



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Figure n°4 : Exhibit 3 Loan margins at financial close for European PPP infrastructure projects have halved since 2012 (Loan margins, 12-month moving average) - Note: The data shown in Exhibit 3 is from a mix of UK and other European PPP infrastructure projects. We ca


than three quarters of member states have identified financing constraints (associated with both public and private sources of finance) as a barrier to long term investment, despite there being a high level of liquidity in financial markets. To attract more private sector finance into infrastructure projects, policy makers will need to consider how material residual risks or other constraints can be mitigated so that potential transactions are seen as investable opportunities.

Lack of opportunities for investors seeking credit-worthy infrastructure assets

As a result of the global financial crisis, government budgets and resources are constrained in many countries. This has led to a decline in infrastructure investment, whether procured directly by the public sector or indirectly via concession, PPP arrangements, or supported by other public sector funding commitments. Within emerging market and developing economies, the capacity of the public sector to select, appraise, procure and deliver new infrastructure is often also a constraining factor.

A relative lack of investment opportunities has also contributed to the intense competition between debt providers targeting high quality infrastructure assets in creditworthy, stable countries. We foresee a number of positive developments arising from such competition, including the evolution and innovation of debt terms and conditions and the spill-over of liquidity into more challenging jurisdictions and less competitive areas of the infrastructure landscape. Indeed, we have already seen the emergence of bond struc­tures that create bank-like deferred drawdown arrangements to reduce the “cost of carry” associated with traditional bond financings, as well as increased international and sectoral diversification of debt origination efforts as banks and investors leverage their areas of comparative advantage and respond to market opportunities, such as the growth of P3s in the US, the growth of renewables in Europe and the development of transportation infrastructure in Asia Pacific.

However, we also anticipate certain negative developments where competition is particularly intense, including (1) the potential weakening of credit quality or mispricing of risk as borrowers/issuers seek more equity-friendly terms for new investments or refinancing; and (2) the risk that a sustained shortage of investable deal flow will lead to an erosion of debt capacity, available equity and practitioner expertise, as



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Figure n°5 :


the infrastructure debt market readjusts to lower levels of investment activity.

New initiatives will provide infrastructure investment opportunities

Over recent months, a number of international initiatives have been launched that are intended to stimulate investment in infrastructure in advanced economies, emerging markets and developing economies. These initiatives include:

  • The G20’s Global Infrastructure Initiative (announced in November 2014) a multi-year programme to support public and private investment in quality infrastructure by taking actions to lower barriers to investment, increasing the availability of investment-ready projects, helping match potential investors with projects and improving policy delivery. A Global Infrastructure Hub will be established to provide dedicated resources to implement those actions.
  • The EC’s Investment Plan for Europe (the Juncker Plan, announced in November 2014). The plan has three complementary strands: (1) to establish the European Fund for Strategic Investments as a source of risk capital, to mobilise private sector finance to deliver €315 billion of additional investment in strategic sectors (including infrastructure) over 2015-17; (2) certain practical measures to identify and create viable investment opportunities including the esta­blishment of a pipeline of investable projects within the EU and the establishment of an investment advisory hub to facilitate project development; and (3) certain measures to provide greater regulatory predictability and remove barriers to investment.
  • The Global Infrastructure Facility (GIF, announced in October 2014) a global initiative led by the World Bank Group to facilitate the preparation and structuring of high quality infrastructure projects in emerging markets and developing economies, and thereby attract private sector and institutional investor capital.

These initiatives are constructive steps towards expanding investment in infrastructure across the globe. In turn, these efforts will give rise to new investment opportunities in infra­structure debt that will help remedy the current mismatch between available debt capacity and investable deal flow. However, given the long lead times that characterise the development of well-structured infrastructure projects it will be challenging for these initiatives to demonstrate a meaningful impact in the near term. ■

 

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Andrew DAVISON

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