Thanks so much for the questions. We didn't have time to run through all of them during the live broadcast, Steve and Neil answered them afterwards:
NE: Clearly infrastructure and power represent something like 80% of the project finance market. Both of those areas have a significant amount of availability based position. Very certain revenues because you’ve got strong off takers.
SM: Which plays to a bigger constituency of lenders
NE: Precisely - because you’ve got the security of your cash flows in terms of fairly stable revenue lines. I think in answer to your question, infrastructure might be slightly more attractive given that there is slightly less operating risk than on say an offshore wind farm, than perhaps there would be on availability of a road or office.
SM: I think that’s right and that’s reflected in margins and gearing levels. If you look at Project Finance International, IJ Global etc and you look at the highest geared projects and the longest maturity, they tend to be the capacity based infrastructure ones - I’ve seen as high as 96-97%. There’s not a lot of risk capital sitting there.
NE: I think with that long tenor position in Western Europe, in particular, there’s a number of commercial banks that have some degree of tie-up on a risk sharing basis where they will automatically sell some of their paper into the institutional market. But I think you’ll find that particularly on that A7 example, some of the banks involved were German banks with relatively low cost of funding and they were willing to hold that asset, on their own book, for that period of time.
SM: I think that’s fair. They will see these assets as being pretty safe portfolio assets – they don’t need a lot of management. They don’t make you a fantastic return in project finance terms but they’re quite good compared with corporate lending – you do them, you tuck them away.
NE: I think one of the banks involved in that period is one of the commercial co-operative banking system in Germany, so it’s a slightly different proposition but the appetite for long tenor is certainly reflected across the whole spectrum of banks. You’re also in a situation where you’ve got a lot of money coming in from the Japanese banking market – Mitsubishi UFJ, Sumitomo, Mizuho – I think there’s something like 20-25% of the whole project finance market is held by the bank of Japanese.
I don’t see any real evidence of the Japanese banks selling out to the institutional market. What I do see is the Japanese banks have had a significant interest in developing a business outside of Japan because of the fairly low rates available due to the amount of quantitative easing going on there and they have a very strong appetite for project finance assets.
SM: Just to come back to the insurance market, there’s no doubt about it, the insurance market does have a very strong appetite and the pension fund has a very strong appetite for some of these assets. Not least because getting a reasonable return on financial assets these days is extremely difficult for them, they’re going through a very tough time in the pension fund sector. I think particularly where you’ve got big ticket transactions – huge LNG liquefaction projects for example – a bank that knows it’s actually got some pension funds, insurance companies willing to risk participate, allows them to come in and write a bigger cheque initially with a view to selling that down into the market.
NE: You’ve got some situations where people like Allianz are willing to do a €300-400m ticket but they are only going to be playing in the OCD markets.
SM: Emerging market risk is really not for them.
What would be interesting to see is emerging market institutions, pension funds etc, perhaps getting involved in project finance, in emerging markets - and if we can do that then we could look at more local council financing which in turn could massively alleviate one of the biggest risks we have in emerging markets - and that’s the availability.
SM: Interestingly, on our distance learning course, Mechanics of Project Finance, we have had pensions/regulators from emerging markets doing the course with a view to understanding the issues there. I’m quite encouraged by that.