Private capital for infrastructure finance

 If we consider the point of view of a private investor, either a debt or pure equity investor, infrastructure represents an interesting alternative asset class. Infrastructure projects show interesting characteristics vis-à-vis more traditional asset classes.

Infrastructure can be financed using different capital channels. The evolution of capital markets shows that financial innovation develops new financial tools able to attract a larger amount of funds in response to supply 

Private capital for infrastructure finance

An overview of the different alternatives available to private investors.

 It first divides the instruments into equity and debt. Equity and debt can be listed and traded on an exchange (public) or unlisted and traded over the counter (OTC; private). In the case of listed equity and market-traded debt we make reference to a traditional investment in listed infrastructure. This is the area where mutual funds and exchange traded funds (ETFs) have developed products to be included in the portfolios of retail investors, high net worth individuals and institutional investors.

 Project finance and loans 

Project finance debt has started to be used in the United States since the early 1930s in oilfield development and later in Europe at the beginning of the 1980s. It has been systematically used since then in a number of sectors in association with large-scale infrastructure projects. Debt has been used in the form of syndicated loans, with a pool of banks headed by one or more Mandated Lead Arrangers (MLAs) that organise the financing package for a single borrower. The development of the market has seen a period of very significant growth until the outburst of the 2007–08 financial crisis. According to Thomson OneBanker data, in 2008 the global project finance loans market reached a record peak of USD 247 bn but then declined sharply in 2009, and recovered somewhat thereafter, to an amount of USD 204 bn at the end of 2013. At the end of 2013, project finance accounted for slightly less than 5% of syndicated loans worldwide after, again, a peak of over 9% reached in 2008 (Figure 2). 

Project finance is used worldwide to support infrastructure financing. The geographic breakdown of loan volumes indicates a concentration of project finance loans in four significant geographic areas — Western Europe, North America, Africa and Middle East, and South Asia — which respectively account for around 19.2%, 18.5%, 14.4%, and 7.3% of the total value of project finance loans in 2013 (Table 2). These figures are pretty stable over time.

In terms of sectors where project finance loans are used, data show that developing countries and emerging economies still adopt the technique for economic infrastructure (energy and power, mining and natural resources, oil and gas, transportation and telecoms), whereas industrialised countries increasingly use project finance loans to finance also social infrastructure. Considering global data, Thomson OneBanker data indicate that power, oil and gas (54%, end-2013), and transportation (20%) were the most representative sectors in terms of project finance lending volumes

Project bonds 

The alternative to syndicated loans is represented by the financing of infrastructure projects on the bond market. In this case, we refer to project bonds, i.e. bonds that are issued by the SPV and sold to either banks or, more frequently, to other bond investors. The bond can be a straight bond, whose creditworthiness depends on the cash flow performance of the vehicle, or a secured bond assisted by credit enhancement (CE) mechanisms. In the past few years, at least until the outburst of the financial crisis, one of the most used forms of CE was a monoline insurance provided by highly rated monoline institutions. By looking at the data, project bonds still represent a limited amount of the total debt committed to infrastructure financing, although increasing rapidly. During the 2007–12 period, the amount issued by SPVs via project bonds bounced between USD 8.5 bn and USD 27 bn (Figure 3). 2013 registered a record amount of USD 49 bn in project bonds issues representing slightly more than 24% of the total debt provided to infrastructure. The strong increase between 2012 and 2013 was in part due to the overall decline of bond yields on all major asset classes and the consequent need for fixed income investors to find other investments with a better risk/return profile than more traditional sovereign and corporate bonds. The breakdown by geographical areas and sectors shows a clear concentration on some sectors (infrastructure, power, social infrastructure, and oil and gas) and a polarization in United States/Canada, UK and Western Europe, with the latter losing ground in the final part of the period under examination.

Compared to syndicated loans, project bonds present some contractual features that make them more attractive to institutional investors rather than banks. First, bonds are more standardised capital market instruments and show better liquidity if the issue size is sufficiently large to generate enough floating securities. A higher degree of liquidity can trigger a lower cost of funding vis-à-vis syndicated loans. Second, larger issues can become a constituent of bond indices, adding further interest for benchmark strategies of bond.

Pension Funds 

Inderst (2009) provides estimates of the total commitments of pension funds to infrastructure for 2008. A raw estimate quantifies the total commitment in listed infrastructure stocks at USD 400 bn. Excluding utilities, the figure is estimated at around USD 60 bn. The OECD Survey on large pension funds published in October 2013 (OECD, 2013b) shows that despite a limited direct average allocation to infrastructure some funds are allocating important percentages to infrastructure either in the form of (listed and unlisted) equity or fixed income. Towers Watson and Financial Times’ Investor Survey 2014 reports that, out of the USD 3.26 tn total assets under management (AUM) by the top 100 alternative investment asset managers, USD 120.6 bn were invested in infrastructure (Figure 6). Pension funds, insurance companies and SWFs were the investors more inclined to invest in infrastructure (9% and 10% of their AUM, respectively).

Sovereign Wealth Funds 

A recent paper by The CityUK (2013) reports that, out of a total AUM value of USD 5.2 tn at the end of 2012, USD 52 bn have been invested directly in infrastructure between 2005 and 2012. Furthermore, 56% of Sovereign Wealth Funds declare to allocate resources in infrastructure investments. In 2013, data reported by the OECD (2013a) indicate that in a sample of the most important SWFs worldwide, the percentage allocation to infrastructure is remarkable with peaks between 10–15% in Temasek and GIC (Singapore), the Alaska Permanent Fund (US) and the Alberta’s Heritage Fund.

Havelet Finance Limited is equipped with the abovementioned possible alternative to funding. In the emerging financial Market, we have dedicated our time in acknowledging projects from all corners of the globe and alongside helping business to grow through Project Finance, International Loans, Sovereign wealth Funds, grants, pension funds and bounds as mentioned in the heading above. Havelet Finance Limited have the capacity to fund any project provided the project is viable enough to yield returns.

Website:http://www.havelet-finance.com/
Email: credit@havelet-finance.com