Proximo Weekly: An ECA-backed gauge of project demand
Proximo’s sister publication TXF has issued its H1 2021 Export Finance Report on ECA-backed volume. The results give a flavour of the impact a year of pandemic stasis over final investment decisions has had on project volume globally.
At the start of the pandemic expectation was there would be a rush of calls to ECAs for project support. There was, at least for rejigging existing financings and general pandemic support. But according to figures collated by TXF Data, ECAs are still waiting by the phone for new business to start matching anything like pre-pandemic volumes.
During H1 2021 TXF Data recorded 142 ECA supported deals (up from 129 in H1 2020) covering $26.6 billion of deal volume (down from $46.9 billion in H1 2020). Of that $26.6 billion total deal volume, ECA-backed debt (direct loans and covered tranches) accounted for $22 billion, down from $35 billion in H1 2020, but considerably up as a percentage of the overall ECA-supported debt provided. In short, demand for volume has lagged, but more ECA support as a proportion of debt provided has been required from the deals that have come to market.
Given the long due diligence processes involved in ECA finance and the gestation period of big-ticket projects from blackboard to financing, the vast majority of 2020 deals would have been in the pipeline pre-pandemic and therefore did not give a true picture of the demand curve caused by the pandemic. Logic dictates the demand curve for ECA debt will go up as the global economy recovers, but the volume signals have yet to appear, in large part because of the lag in final investment decisions spawned by the global lockdown.
The biggest changes have been in the combined power and renewables sector. With a roughly 50% drop in the volume of ECA-backed financings compared with H1 2020, in both renewables and conventional power, H1 2021 indications are that by the end of the year the conventional power market could have had its first significant volume variation in five years – and it’s a downward one.
Part of the conventional power decline is explained by the recent retreat of major ECAs, notably JBIC and NEXI, from coal-fired power. But the downturn in ECA-backed renewables volume reflects the strong appetite from commercial banks and institutional debt investors for the sector.
Commercial debt pricing for renewables is very competitive, the deals are largely vanilla, and the majority of sponsors will try and avoid adding ECA due diligence into the mix unless the economics or risk of a particular project make it off limits to commercial lenders. At its simplest, for the majority of wind and solar deals cost of debt is not an issue, so ECAs are just bringing risk mitigation to the table and there are private sector alternatives to mitigating those same risks that require less negotiation.
That said, commercial bank sector participations in ECA-backed and DFI-backed deals was largest last year in the combined power and renewables sectors, with 21.5% of the ECA tranches and 28.5% of the commercial tranches incorporated across all ECA-backed deals. The figures mirror the appetite amongst lenders for all things renewable, an appetite spawned by the strong performance of the sector throughout the pandemic (although part of that performance was due to many projects still being on tariff support schemes with priority into the grid, benefits that are being phased out as the sector becomes increasingly zero subsidy).
There are still renewables niches where ECA backing is and will become key in the next decade. Arguably, the short- and medium-term term future for ECA-backed renewables debt is in the offshore wind sector as it moves to zero subsidy, and potentially blue and green hydrogen, markets that have major oil and gas and renewables credits respectively pushing their rapid development.
Of all the ECA-backed sectors, oil and gas has had the roughest half-year. The sector is always cyclical, but oil and gas market ECA-backed volume plummeted from just over $12 billion in H1 2020 to just under $2 billion in H1 2021. The only surprise with H1 2021 oil and gas ECA-backed volume is that it is not lower, given 2020’s global slump in pricing and demand and the consequent shelving of final investment decisions (FID) for many projects.
The FID lag will likely affect volume for another six months, and although there has been a rally in gas prices this year on the back of renewed demand, the majors are likely to maintain that high pricing by keeping investment in new production capacity just behind the demand curve – particularly given uncertainty over how many more decades current production levels will be required as governments finally begin to pile on the pressure for accelerated energy transition.
Even when demand for ECA backing from the sector grows again, ECA appetite may not be what it once was given the direction of climate change politics among the major ECAs’ political masters. Oil is already joining coal as a pariah fuel, and the transition fuel status gas enjoys is under debate. Furthermore, the force majeure earlier this year of Total’s Mozambique LNG project – a deal heavily backed by direct ECA loans from US Exim ($4.7 billion), JBIC ($3 billion), Thai Exim ($150 million), and cover from NEXI ($2 billion), UKEF ($1 billion), SACE ($950 million), ECIC ($800 million), and Atradius ($640 million) – and the shelving of the Rovuma LNG project, both because of terrorist attacks in Mozambique, will have given ECA credit committees heightened emerging markets risk sensitivity.
To download the full report from TXF click here.
Selected news articles from Proximo last week
Law firm Pillsbury has appointed energy and infrastructure projects lawyer Veronica Relea as a partner in its global finance practice.
The Norwegian Public Roads Administration (NPRA) has awarded a NOK19.8 billion ($2.27 billion) public-private partnership (PPP) contract to finance, design, build and operate a 9.4km, four-lane road link in the western county of Vestland to the multinational Sotra Link consortium, owned by Macquarie Group (70%), SK Ecoplant (20%) and Webuild (10%).
Uzbekistan’s Ministry of Energy and Ministry of Investments and Foreign Trade are procuring an IPP to develop, finance, construct, own and operate the 100MW Qorao’zak phase I wind power plant project in Karakalpakstan.
MIDDLE EAST & AFRICA
Angola has sealed $1.09 billion in financing for a project to expand and improve the Luanda BITA Water Supply Guarantee Project to improve water services in the capital.
Chile's Comision Nacional de Energia (CNE) has awarded projects to five companies in its tender for the annual supply of 2,310GWh of renewable energy for 15 years from 2026.
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