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The Secondary Market for Infrastructure Assets and Options for Project Refinancing: A Seminar Summary

On Friday 4th March, I attended a breakfast seminar hosted by EY on the topic: The Secondary Market for Infrastructure Assets and Options for Project Refinancing.

The event was fantastic: it was very insightful to listen to a panel of such knowledgeable industry experts. I also met numerous individuals from a wide range of corporates.

The seminar included the following individuals:

Moderator:

  • Manish Gupta, Partner, Corporate Finance – Infrastructure, Transport & Government, EY

Panel Members:

  • Robin Herzberg, Managing Director, Carillion Private Finance
  • Sarmad Qureshi, Finance Director, DP World
  • Ian Rylatt, CEO, Balfour Beatty Investments
  • Ben Loomes, Managing Partner, Infrastructure and Group Strategy Director, 3i
  • Michael Ryan, CEO, Partner, Dalmore Capital

Below is a synopsis of the seminar which I hope is both interesting and thought provoking in terms of the financing arrangements for construction projects.

There is currently a large appetite for infrastructure assets in the secondary market, which has contributed to a very competitive market in terms of debt and equity margins offered by banks and institutional investors. There are two principle factors behind this: firstly, there has been a lack of primary pipeline over the last 10 years, so more capital is chasing assets in the secondary market; and, secondly, budgetary pressures in the public sector have made private finance initiatives an attractive tool to keep large projects off the government’s balance sheet.

The panel explored ways in which the infrastructure sector can attract more private capital, which was effectively a discussion around de-risking projects. This can be achieved by structuring deals so that risks are allocated to those parties who can best mitigate them and/or those who have an appetite for them: demand risk and cost overrun risk were noted as being two of the most critical.

The regulated asset model, as seen with Thames Tideway and other regulated utilities, was cited as structure that is well received by markets as there is very low demand risk coupled with a guaranteed rate of return established by an industry regulator. In instances such as these, credit rating agencies are able to provide a credit rating for the infrastructure asset / utility which provides access to more sources of finance, particularly bonds and other fixed-rate debt. This increases the competitive tension in terms of financing, translating into lower rates obtainable.

In terms of project refinancing, the panel recognised that recent refinancings in PPPs had been driven by public sector parties, principally due to budget pressures and the public sector’s desire to realise their share of any refinancing gain.

The panel discussed the use of pension funds to finance infrastructure assets and cited examples from abroad. Canadian pension funds have a culture of investing in Canada’s infrastructure; however, that model has not historically existed in the UK. The larger pension funds that operate in Canada do have greater amounts of capital to invest alongside considerable in-house expertise resulting from their years of investing in the sector. If the UK were to leverage this Canadian experience, and amalgamate or bring together some of its larger pension funds, then that could facilitate a similar model here. The panel did also note that some recent transactions have seen pension funds invest in riskier assets than usual and suggested that this could be due to the perception that infrastructure assets are safe, stable investments in the current economic climate.

Finally, the panel raised the issue of Brexit and the negative effect it is having on financial markets. The subject is causing considerable uncertainty in capital markets which, as a consequence, contributes to higher rates: this could result in significantly greater costs for privately financed infrastructure projects going forward. The panel, perhaps unsurprisingly, unanimously supported the status quo in terms of the UK’s relationship with the European Union.

I hope this was an interesting summary of the seminar, I certainly found it very informative. If you have any questions on this piece or the matter to which it pertains, please do get in touch via the dedicated Infrastructure Finance channel on G4C’s Slack discussion forum.

Oliver Bradley is a Commercial Analyst at HS2