PROJECT FINANCE DEBT JUST GOT SEXY. INSTITUTIONAL investors will soon start ordering bulk credit reviews of dozens of infrastructure loans held by European lenders, predicts Arthur Simonson, head of project finance for the Americas at Standard & Poor’s. “We may see one bundle of 70 assets, with multiple buyers and one review by S&P,” says Simonson, who is based in New York. Pension funds, sovereign wealth funds and other institutions didn’t used to care much for infrastructure loans, which back everything from transportation projects to utilities. No wonder: Despite their promise of regular payouts over the long haul, these loans traditionally combined tight spreads with risks unfamiliar to institutional investors. But several changes — the shrunken collateralized debt obligation market, widening margins and an explosion of offerings — have prompted a second look. Worldwide the infrastructure loan market is worth at least $500 billion, says Bob Dewing, a New York–based portfolio manager for infrastructure debt with J.P. Morgan Asset Management’s global real assets group.
Asset managers are paying attention. Last fall, for example, J.P. Morgan hired Dewing to head a new infrastructure debt team that advises pension funds, insurance companies and sovereign wealth funds. Some investors have tapped advisers or asset managers to assemble loans from multiple banks into billion-dollar portfolios. There’s plenty to like about infrastructure loans. Their distant maturities, often seven to 18 years away, appeal to long-term investors, and they typically yield 2 to 4 percent. Infrastructure portfolios also offer diversity across sectors, geographies and currencies. “Once investors have learned the attractiveness, they’ll stay,” Dewing contends.
European lenders, who are among the biggest backers of private infrastructure projects, have no shortage of product to flog. Several, including French banks BNP Paribas and Société Générale, are peddling infrastructure loans singly or in batches as they seek to boost capital reserves and meet liquidity and funding ratios set by Basel III regulations. Another incentive: Some European banks hold billions in Greek and Italian sovereign debt.
Asset managers expect an uptick in sales of infrastructure loans this year, but the speed of deal flow is uncertain. That’s partly because sourcing, scrutinizing and executing a portfolio can be laborious.
The assets call for individual review, probably by a rating agency. “A lot of people think that buying a portfolio is good for size and scale, but you still need to carefully underwrite the individual assets,” says Kirk Edelman, U.S. CEO of Germany’s Siemens Financial Services, a potential buyer of infrastructure debt.
Also, sellers used to price infrastructure loans more aggressively — say, LIBOR plus 100 to 150 basis points. So when it comes to existing debt, investors are wary of yields beneath today’s floor of 200 to 300 basis points. “These are great loans, great credits, but they’re mispriced, and they always were,” says Marc Bajer, chairman of London-based Hadrian’s Wall Capital, adviser to Aviva Investors Hadrian Capital Fund I. The fund, which should complete its first close this quarter with £150 million ($230 million) in assets, will provide long-term subordinated senior debt for European infrastructure financings.
Infrastructure loans often feature derivatives, swaps and pricing step-ups; all of this adds to the complexity of a sale. Investors are wary of refinancing risks: When margins compress, borrowers tend to pursue refinancings en masse. Then there’s the risk of each loan. “You don’t just buy the loan,” Bajer says. “You buy the counterparty exposure to a European bank.” Perhaps the biggest deterrent? Lenders are gunning for sales close to par. For instance, Société Générale wants at least 98 cents on the dollar for its power-generation loans.
These obstacles may discourage institutional investors — to others’ benefit. So far, buyers include Canadian and Japanese banks and nontraditional lenders such as GE Energy Financial Services, which snagged nearly $1 billion worth of project finance loans from Bank of Ireland in a 2011 auction. • •
