Open Book Publishers logo Open Access logo
  • button
  • button
  • button
GO TO...
Contents
Copyright
book cover
BUY THE BOOK

8. Structuring the Financial Mosaic

© New York University/Stern School of Business, CC BY 4.0 http://dx.doi.org/10.11647/OBP.0106.08

Depending on the SPV sponsors’ risk tolerance, the equity component of total financing may take one of two forms. It can be straight equity, funded by balance sheet cash in the case of a corporate sponsor, or by budgetary resources in the case of a government sponsor. It can also consist of shareholder loans that represent a more senior claim in the capital structure relative to equity and will need to be repaid.

On the debt side, commercial bank loans have traditionally provided a key source of funding for most projects, supplemented by credit facilities from multilateral development banks (e.g., the World Bank and the Asian Development Bank) and sovereign lenders (e.g., Export Development Canada, Germany’s Hermes, and Mexico’s Nacional Financiera), as well as bonds placed with institutional investors (mainly insurance companies and pension funds) and lease financing arrangements.

The overall infrastructure finance debt mix tends to be diversified by lender, maturity, and currency. It is usually balanced between floating- and fixed-rate borrowings, with a heavy emphasis on the former to minimize interest rate risk during the often extended life of a project.

Typically, bank loans are used almost exclusively during a project’s higher-risk construction phase. These loans can then be partially replaced with fixed-rate bonds once a project begins to generate cash. Syndicated bank loans can be tailored to a project’s specific needs to provide for construction cost overruns, delays, and other contingencies. In extremis, they can be restructured without triggering an event of default. The key role of bank lending highlights the need for loan syndicates to involve experienced banks that understand project risks and demonstrate the necessary discipline under adverse conditions, led by a highly reputed agent bank.

Loans provided by commercial banks priced at a fixed margin above floating-rate US dollar LIBOR or Euribor benchmarks, plus loans from Aaa/AAA rated multilateral development banks and highly rated sovereign agencies, typically represent the cheapest source of funding for any project. The latter, however, are usually capped at a relatively small percentage of overall project debt.

Any government guarantees in such financings put the financial exposure of infrastructure projects back onto the government balance sheet, a scenario that non-recourse project finance is designed to avoid. Most project debt is rated investment grade (low BBB or higher) and ranks as “senior secured”, although unsecured, subordinated, and mezzanine debt tranches are also possible.

Given the multiple debt counterparties involved in project and infrastructure financings, inter-creditor agreements, covenant packages, and debt service reserve accounts are all important negotiating points. Most such financings are document-intensive transactions that require significant time and effort to close. As a result, structuring, advisory, and commitment fees all tend to be higher and lending margins wider compared to straight public corporate debt issuances and certainly compared to sovereign debt finance.

From a public- or private-sector sponsor’s perspective, the final mix of project and infrastructure finance is designed to maximize total outstanding debt whilst minimizing overall financing costs, thus preserving the level of returns to shareholders and minimizing the exposure of public finance.