IFR Asia: appetite slowly returns for project finance

IFR Asia, September 2009

Project finance in Asia, while hit by the credit crunch, has a number of reasons for optimism. Funding sources appear to be returning, and the demand for power and infrastructure in Asia is every bit as big as it always has been.

“Project finance is a very long term game with a considerable gestation period for any of these deals,” says David Gardner, managing director and global head of project finance, resources and energy group at HSBC. “We don’t see a lot of volatility day in day out: you might have to delay a project but for the most part deals need to stand up on their own and if so will remain on the books. There’s a real supply-demand gap so transactions will still get done.” He says over the last year or so around US$10 to 15 billion of project financing has been done in Asia, and that next year he would expect $20 to $30 billion.

Project finance has held its head above water in Asia chiefly because of the liquidity of local banks, which have been relatively unaffected by the financial crisis and have the further advantage of higher savings rates in Asia. Take a look at the biggest announced project finance loans in the last 12 months and local names dominate both in the syndicate and at the mandated lead arranger level: China Development Bank on the Kazakh-Chinese Gas Pipeline; SBI Capital Markets on the ONGC Petro Additions petrochemical complex and the Aircel and Vodafone Essar financings in India; BDO Capital Investment and Bank of China alongside HSBC on the National Grid Corp financing in the Philippines; Bank of China on the China Super Bridge; and IDBI Bank on the Coastal Andhra Power plant in India.

Offshore banks have been hit to varying degrees. “We started to see the whole liquidity premium come into play in the middle of last year,” Gardner says. “Banks had real costs involved in providing long tenor to these transactions so the appetite for them has diminished.” Consequently tenors have shortened and the underwriting market has stepped away. “Most deals done last year were on a club basis with a few banks sitting around a table on a take and hold basis,” says Gardner. “The market is easing back now and we may soon start to see some underwriting, albeit on a smaller scale initially.” He says in terms of tenor “the sweet spot is now probably in the seven to 10 year range”. Bankers say they would like to see a greater contribution from local currency debt markets, where Malaysia and India have shown some success for project bonds.

While activity has slowed, progress on some bigger deals does suggest a brighter future, and this is nowhere more true than with the Victorian Desalination Plant in Victoria, Australia, a A$3.5 billion public-private partnership financing. The winning bidder for this project was Aquasure, a consortium comprising Degremont, Suez Environment, Macquarie Capital Group and Thiess. Funding is in place for this with 15 lenders backing the bid, and syndication under way as this edition went to press.

The deal’s sheer scale is significant in itself, particularly coming out of the credit crunch. “We’re hoping that a deal like this will reopen the underwriting and syndication market for next year,” says someone close to the deal. It’s also interesting in being a fully carbon offset project serving a key community need – Victoria has been in drought for a decade now – and it is understand that these issues, combined with the strong support of the Victorian government, helped to attract banks to it.

Progress with this deal is likely to be felt in other Australian PP projects, covering roads, hospitals, schools and prisons, among other things. The A$750 million Peninsula Link project linking two roads in Victoria is at the shortlisted bidder stage, while there are prison PPPs in Victoria and Darwin and another, worth A$2 billion, for the Royal Adelaide Hospital in South Australia. Another project financing underway in Australia is a A$750 million deal for Epic Energy to build a pipeline in Queensland. Several windfarm projects are also in progress, and at some point the PNG LNG project in Papua New Guinea – a deal that has the potential to transform that country’s economy – will move forward.

Elsewhere, project financiers expect China to be a major driver across the board from power to oil and gas, petrochemicals and mining, driven by ample demand and the Chinese government’s willingness to push growth, as well as vast domestic liquidity in the local banking system. India too has liquid banks and huge infrastructure demand, and is going to be another driver of project finance in Asia:  in the power sector alone, it has announced 14 so-called “ultra mega power projects”, each with a capacity of at least 4000 megawatts, as part of a plan to create an additional 100,000 MW of capacity by 2012. As always with India, getting to the finish line can be a challenge, but the intent is immense.