INFRASTRUCTURE SPONSORS' NEED FOR A RELIABLE SOURCE OF LONG-TERMFINANCING HAS LED TO A WEALTH OF OPPORTUNITY FOR INSTITUTIONAL DEBT INVESTORS IN THE USAND EUROPE TO INVEST IN A VAST ARRAY OF STABLE, HIGH-QUALITY ASSETS. WHILE BANK DEBT REMAINS AN IMPORTANT PART OF THE FUNDING MIX FOR INFRASTRUCTURE SPONSORS, THE INSTITUTIONAL MARKET IS BECOMING INCREASINGLY ATTRACTIVE IN OFFERING LONG-TERM FINANCING AT COMPETITIVE RATES. THIS ARTICLE WILL LOOK AT SOME OF THE KEY TRENDS IN THE US AND EUROPEAN INFRASTRUCTURE INSTITUTIONAL FINANCE SPACE AND DRAW OUT SOME OF THE KEY MOVEMENTS IN THIS EXCITING AND RAPIDLY CHANGING ENVIRONMENT.
Flexibility offered by different sources of liquidity is a key focus for infrastructure sponsors and the discussion tends to focus on a few key areas:
On most multi-creditor platform deals, the capital expenditure needs of the business are supported, in part, through a revolving credit facility from a bank or syndicate of banks. As this facility is used, it can be cleaned down through a private placement restoring it for further capital expenditure. Such facilities are expensive to put in place for more than seven years; an issue that affects bank funding generally. It is, however, common to 'amend and extend' such facilities as needed.
Infrastructure sponsors tend not to fund capital expenditure directly with institutional debt given that investors tend to offer less flexible drawdown terms. In the context of capital expenditure where delays can mean that funding is not required when initially envisaged or is required earlier if a particular issue occurs, flexibility is key. That being said, in the U.S. market, the drawdown profile is often more flexible given the lack of need for swap indemnities (for U.S. investors). For those U.S. investors that are natural lenders in currencies other than U.S. dollars, there is now a push from European sponsors for U.S. investors to offer the same flexibility on European projects.
Infrastructure sponsors are also keen to lock in rates at pricing for as long as possible before closing and funding occur. In both the U.S. and European market the "3 for free" rule has long been the norm (i.e. three months without the rate needing to be revised or having to pay to maintain the rate lock). However, infrastructure sponsors in both markets are pushing this further and some sponsors have reported being able to lock in rates for up to two years.
A key difference between U.S. and European investors is the need for a rating. Due to NAIC rules, U.S. investors (in particular insurance companies) often require a rating before they are able to invest, although there are exceptions to this rule as evidenced by a number of USPP issuances for European infrastructure projects that were made without a rating.
Maintaining or obtaining a rating does not only allow a wider field of U.S. investors to be involved in a transaction thereby expanding infrastructure sponsors' funding pool, but can also provide infrastructure sponsors with added flexibility for example when linked to portability.
It should also be noted that there is now increased competition for the "Big Three" rating agencies in the form of DBRS and Kroll who are often included on transactions as rating agencies from whom a rating can be obtained. For the purposes of the NAIC rules in the U.S., both DBRS and Kroll are a "nationally recognized statistical rating organization".
Waivers and Consents
Whether rightly or wrongly, it is often perceived, particularly in the European market, that institutional investors can be slower in dealing with waiver and consent requests than banks. This may be because the bank pool on a typical large-scale multi-creditor platform generally only includes banks with whom the infrastructure sponsor has close relationships. The investor pool, however, can end up becoming much wider when each of the individual investors/sub-funds is included and often the infrastructure sponsor has no direct relationship with many of them. One area where investors may begin to see more of a push is in ensuring that the sub-investors/funds that they manage are more responsive to waiver or consent requests and that they use their relationships and influence over sub-investors/funds to help infrastructure sponsors in meeting their aims. In addition, an increasing number of European infrastructure sponsors are undertaking roadshows in between specific issuances in the U.S. to meet ever smaller investors as a way of building up direct relationships with them and therefore not need to rely as heavily on the relationship with the fund manager.
Make-whole is often hotly contested by both U.S. and European investors on infrastructure financings in both markets, but is not typically a feature of the bank debt market. On multi-creditor platforms there is also often debate as to whether make-whole should rank pari passu with the principal of other funders (e.g. banks).
Infrastructure sponsors in both the U.S. and European markets are increasingly asking for make-whole holidays towards the maturity of their private placement debt in order to refinance. This is now starting to be seen between three and six months prior to maturity.
In refinancing scenarios, investors may be asked to roll their notes into the new structure to avoid the need to pay makewhole. For the rollover to work, the new notes typically have to have the same pricing and tenor as the refinanced notes, otherwise there may be tax consequences for the investor. A new note will also need to be issued with a new private placement number (if required). This approach has worked successfully on a number of recent deals.
US investors typically require swap indemnities when investing abroad to the extent they are not a natural currency lender. Increasingly, U.S. investors are using their ability to lend naturally on European projects in order to set themselves apart from their U.S. competitors, but swap indemnities are still often required by many U.S. investors.
For European sponsors, one of the key tensions in the way the Model Form swap indemnity language is drafted is that the issuer is obliged to pay amounts of make-whole in U.S. dollars, but it will not receive any "Swap Breakage Gains" (again in U.S. dollars) until it has paid the make-whole. For a European issuer that does not have income or obligations in U.S. dollars (other than the payment of make-whole), this means they would need to buy U.S. dollars in the market in order to pay the make-whole and then, if there is a "Swap Breakage Gain", they may receive U.S. dollars from the investor which they again, need to sell. European infrastructure sponsors have been seeking to have the two amounts netted before a payment is made so that they only need to pay (or receive) a netted amount of U.S. dollars, thus lowering their currency exposure. This conversation continues, including at the ACIC committee level. There is clearly a great deal of activity in the infrastructure funding space and plenty of scope for crossover and the sharing of experiences between the U.S. and European infrastructure finance markets.
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