Funding through partnership

Benjamin Sirgue, head of aircraft, export and infrastructure finance, Natixis

There should be no illusion that the financing landscape for large infrastructure projects in Europe is in transformation. One noticeable change is the continued caution from significant bank lenders to the sector, mainly due to constraints caused by proposed regulations and other post-crisis adjustments.

That said, one positive development from this potentially bleak setting is the growing number of initiatives in the infrastructure debt market, with institutional investors partnering with banks being one of them.

Some – though currently too few – banks have cemented their position by setting up specialist infrastructure debt vehicles to encourage external sources of liquidity into the market. Furthermore, many of the leading project finance banks are refocusing on an ‘originate-to-distribute’ business model that aims to include a wider group of investors in the debt allocation process.

Even with an increase in the number of lenders, however, liquidity remains a problem due to the scale of the required funding for infrastructure projects – for both greenfield and brownfield refinancing and acquisition. Fortunately, highly liquid institutional investors – such as pension funds and insurance companies – are increasingly viewing infrastructure debt as an attractive sector for diversifying their asset base.

However, while institutional investors are keen to enter the market, impediments remain. A key problem is their ability to evaluate these highly complex deals on their own. Most such institutions lack the in-house resources to judge the risks involved, let alone structure complex project financings. Furthermore, project financing typically requires a high degree of monitoring during the term of the debt – and for such supervision to occur, significant disclosure of project information is required: experience and information that has only been with banks up to now.

It therefore makes sense that investors needing expertise and banks needing investors should work together. Institutional investors can become a reliable source of capital, while established banks can stay involved in the origination and structuring of these major transactions.

By sharing transaction and credit analysis to facilitate decisions, each partner can retain its own investment strategy while maintaining full control of their holdings. Such a solution allows the institutional investor to benefit from the bank’s capabilities, while they are also able to retain the final say on key decisions and management.

Natixis signed one such partnership with the Belgium-based international insurer Ageas in August 2012, and also signed a memorandum of understanding to co-invest through a partnership with French insurer CNP Assurances in June this year. These agreements involve each insurance company investing in infrastructure loans originated by Natixis – within a portfolio totalling €4bn (£3.4bn) over a two-to-three year period. On top of this commitment (€2bn from each insurer), the bank retains a pre-agreed percentage of each facility, while it undertakes the servicing of all the loans in the portfolio over their entire maturity.

From both a bank and investor perspective, the alignment works in both of their interests. For the bank, the aim here is to continue delivering long-term financing for its clients while also proposing its know-how and experience throughout the infrastructure asset’s lifecycle – from financial advisory, to structuring, to distribution and debt servicing.

Meanwhile, real money investors want access to the large existing project finance dealflow (by leveraging the bank’s origination contacts) in order to acquire long-term assets that match their long-term liabilities and offer better spreads than government bonds.

Certainly, a bank such as Natixis can share its market experience and ensure an all-round understanding of the investment characteristics of the deal – assisting both corporate clients as well as potential investors. The implementation of originate-to-distribute and hold-a-part business models increases the investment potential of the entire value chain, as a larger number of investors become involved in a greater number of deals.

This should smooth the worries of the project sponsors, many of whom have expressed concern about banks leaving the market.

The partnership structures are a positive response to the growing demand of infrastructure funding across Europe. And the model focuses on matching the skills and expertise of players in the infrastructure financing market, whether they are new or traditional players. In this respect, the market has found a very neat supply-side solution to what was a supply-demand mismatch in specialised infrastructure financing.

The recent closing of Brussels Airport’s refinancing is illustrative of the application of such partnership, where Natixis and Ageas were able together to offer a significant size of the financing.

In light of such trends, it is no surprise that a growing number of specialist infra-debt partnerships are developing between banks and institutional investor. We are convinced that the pathway to more partnerships between banks and institutional investors is a promising one, hence our enthusiasm to be joined by new partners to further develop the model outside Europe.