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Project Finance Q1 Deal Digest

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The Infrastructure market continues to see steady growth with PPP activity in Europe but with the key focus firmly on the renewables space. The ongoing quest for yield seems to be drawing a wider variety of investors and debt providers into this sector, prompting ongoing competitive lending margins from lenders. 

Most of the activity we have seen in this last quarter has been in Europe, although we are seeing much more activity and focus on Australasia. In addition, there seems to be some ‘promising’ progress being made in South Africa regarding the Eskom embargo on signing approved PPAs and we would like to think that a number of projects will reach close later this year. In regard to new geographies, we are also seeing a greater emphasis elsewhere in Africa and in particular in India, Latam and Asia. We suggest that these areas represent a significant pipeline of future renewable activity.

Closer to home, we are still seeing a significant number of project refinancing’s that are also attracting competitive terms and XVA pricing where required. Many of the larger projects are EUR based albeit we have completed quite a number of smaller GBP transactions representing legacy PFI projects.

The key focus recently has been on the future long term cost of debt. While we do not expect to see much movement in loan margins, underlying long term rates are increasing globally. We have already seen UK rates revert back up to a 0.5% base rate, Mr Draghi has signalled the steady curtailment of QE in the Eurozone and the Fed have essentially promised a further rate rise in the US before Christmas. However, all these economies are keen to point out that any rate increases will be gradual and in small steps, making it very clear that they do not want to spook economies and disrupt the current steady progress. This is all on the back of promising signs of more sustained economic growth, or at least a future improvement where the UK is concerned, which we are indeed beginning to see.

For the future of Infrastructure we do not see this as a material problem. We would not expect long term rates to increase that quickly and alternative asset classes are in the same boat. We still see one key advantage of infrastructure as the long term visibility of its income. There are few asset classes that can offer this with similar levels of risk and return.

 

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AUTHOR SPOTLIGHT

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Ian MacFarlane

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