During the days of easy credit, the definition of what constituted an infrastructure asset was greatly stretched. A quasi-monopolistic entity with regulated returns and more or less insurmountable barriers to entry was originally what fitted the box, but as money poured into the debt markets the shape of what was considered infrastructure lost its sharper edges.
At the height of the market last summer, motorway service stations – in the shape of Autobahn Tank & Rast – passed muster. Those days have gone.
“Banks now want to see classic infrastructure features such as a quasi-monopoly position and high barriers to entry, not just stable cashflows,” says Annie McMahon, managing director, head of structured finance syndication at SG.
Others agree. “At the minute, people are only prepared to underwrite a more narrow sub-set, such as utilities or toll-roads, where there is great security of return,” says Dan Darley, a director in the infrastructure team at
“From our point of view, the definition of an infrastructure asset hasn’t changed and we believe that the market will come back to an acceptance of the less classic deals seen last year.”
In the meantime, the bar is high. “General activity levels haven’t changed since last year – we are a lot busier than we thought we would be given the wider market,” says Darley. “However, a lot of the deals being pitched are not the sort of monopoly, high barrier to entry, regulated assets that the debt market would currently accept.”
The tentative mood of the market appears to be mirrored in the length of time that passes in the lead-up to a launch.
The banks backing the buyout of
One problem for the deals in waiting is that some of the loans that went out last year, such as National Grid Wireless – which offered investors exposure to a mobile towers business among others – did not receive a rapturous reception even in senior syndication.
The leads – Barclays, Dresdner Kleinwort, HSBC and RBS – are believed to have been long on the deal.
However, the challenges around less-classic infrastructure deals do not mean that they are entirely off the table. The long-mooted sale of the towers business of Wind in Italy is, banks said, still being discussed – though the assets would by no means tick all the boxes of the most rigid definitions of infrastructure.
There is also a higher hurdle for financing funkier deals in the current market.
“In a new deal for a less-classic infrastructure asset, leverage would be materially lower than that seen last year – multiple turns lower – and pricing would be at least 50bp higher,” says Darley.
With regard to infrastructure financing in the narrower sense, the market is expecting an airports deal in the shorter term and there are a number of road projects under way in Europe – though these fall more properly into the project finance realm.
In the meantime, there is still the indigestion of the credit feast. One issue is that loans underwritten during that period did not give banks much room for manoeuvre.
The lenders are generally stuck with the pricing and structure agreed then, which can prove challenging when investors start to compare theoretical yields in secondary with those attainable in the primary syndication of deals struck last year.
“Infrastructure loans are definitely perceived as lower risk, so, initially, they held up well in secondary – particularly in comparison with LBO financings,” says Darley. “However, secondary prices are now far enough away from par to impact on new business.”
Having to brave the market with a loan ill-suited to the current climate in terms of both price and structure has not always been the fate that banks faced and their current difficulties appear to be concentrating minds on future avoidance strategy.
“When flex was introduced in 1998, it wasn’t limited in any respect, neither in terms of pricing or structure. It is only in the last five years that the market has started looking at caps on flexes, which shows that unlimited price flex is not unthinkable,” says McMahon.
No-one has said that unlimited flex is necessarily back, but less rigidity certainly is. “Flex provisions last year were completely inadequate to deal with the change in the market and banks want to protect themselves from that going forward,” says Darley. “Last year, the typical flex was around 25bp; now it is at least double that.”
As in other segments of the loan market, banks are also huddling together for comfort in large MLA groups that cut underwriting risk.
Darley argues that the weaker sentiment is not a function of infrastructure credits, however one defines them, but of the wider market sentiment in Europe and North America. There is still money to be had.
“The appetite for debt in a single facility is in the billions, but depends a lot on the structure. The critical equation is more debt equals shorter tenor. Borrowers have to show that they could refinance quickly,” says Darley.