The Debt Connection – May 2014

Date

In this month’s Debt Advisory newsletter from Clearwater Corporate Finance, we look at capital and infrastructure funding.

The global credit markets have seen liquidity improvements over the past 18 months, particularly for large corporates and upper mid-market companies. What we have seen in more recent months has been an improvement in the liquidity available to mid-market and now lower mid-market corporates. This has been particularly apparent in the UK, as those overseas banks that retrenched during the 2008/9 credit crisis have renewed their appetite for lending to UK businesses. In addition, we have seen increased flows of Foreign Direct Investment (FDI) and lending from countries such as the US and, in particular with China, an interest in funding infrastructure projects.

An example of this is Manchester Airport City, a UK Government backed enterprise zone being developed on and around Manchester Airport. The four consortium partners developing the scheme are Manchester Airport Group (MAG), Beijing Construction and Engineering Group (BCEG), Carillion and the Greater Manchester Pension Fund. As part of this project, Clearwater was instrumental in introducing the Industrial & Commercial Bank of China (ICBC) as a funder to the construction phase.

This type of funding opportunity is of particular interest to ICBC and other Chinese financial institutions, as they look to invest and support key projects in the infrastructure, energy and telecoms spaces, which provide stable returns over a long secured tenor. Current activity in the global infrastructure market is being driven by two factors: in the developed world, existing infrastructure has lacked investment for a number of years and needs to be renewed; and within the newly emerged or emerging world, there is a requirement to build infrastructure for the first time.

Market Activity

The leading global project and infrastructure finance sources remain Australia (1st), the US (2nd) and the UK (3rd), with over 70% of project debt continuing to be issued from 10 countries (in addition to the above – France, Mexico, Canada, Saudi Arabia, Brazil, Germany, Russia).

Project lending remains dominated by developed world banks with BTM, SMBC and MFG of Japan leading the way whilst HSBC, NAB, CBA and SG are also very active. This reflects the location of opportunities but also their relative balance sheet strength and appetite. Chinese banks have a strong domestic position, but increasingly are looking to provide overseas finance to the UK, Europe, Africa and South East Asia. Within the European lending market, there has been an easing of longer term bank financing and bond funding continues to come back with several issued across the UK, Belgium, Italy, Germany and Spain.

Non-Bank Lending

Non-bank lending from debt funds, insurance companies and pension funds has become an important source of capital. There have been large inflows of non-bank capital to the market, combined with an appetite from high net worth and institutional investors. Low growth rates in many developed countries have meant a short-term imbalance between demand and supply of investment. Therefore, accessing the right deals for large institutional investors has been of primary importance with many fully staffing their investment teams in local markets. The debt funds space remains fragmented and until market volumes return, it is likely smaller debt fund players will be forced to adopt a niche approach while the larger players compete for the higher value deals.

Europe accounts for more than half of the total capital raised globally in the infrastructure debt fund market, with many new funds now predominantly focused on debt as opposed to a mix of debt and equity. Allianz Global Investors, for instance, recently structured a debt fund to focus solely on UK infrastructure. The bulk of investors in infrastructure debt are public pension funds (c.20%), insurance companies (c.17%) and private sector pension funds (c.11%) – institutions looking to match stable, long-term returns to their own long-term liabilities. We expect non-bank lending volumes to grow as a share of the overall market, driven by capital considerations placed on banks for long-term lending, growth platforms created by institutional investors and the growing availability of this credit source.