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Perspective
10 December 2021

Proximo Weekly: A liquid diet

Region:
Americas
The $1.2 trillion US Infrastructure Bill still leaves a major chasm to bridge between government funding availability and demand. Two recent deals hint at where some of the private sector liquidity to bridge that gap might come from.

With $1.2 trillion signed into law under Biden’s Infrastructure Bill the US does not appear short of a few bob to spend on infrastructure assets. But put that figure into the demand context – for example the American Society of Civil Engineers (ASCE) estimates the cost of getting US infrastructure to just a grade B state of repair by 2025 at $4.6 trillion – it is clear there will be a sizeable shortfall and that private sector investment and funding will be needed to bridge it.

What is less clear is how to generate that liquidity given the void is likely to be too large for traditional project lenders to fill, particularly given Basel constraints, and infrastructure lending requires significant expertise.

Project CLOs, although they have yet to catch on in a significant way, are being peddled as one solution. Coextensively, in the fintech space, Pontoro – a start-up with Bob Dewing, former managing director at JP Morgan Asset Management Infrastructure Debt Strategy, as co-founder – is raising $6 million of seed funding to develop the first institutional-grade digital asset securitisation and liquidity platform.

On the project CLO side, Starwood Property Trust looks set to become the US’ first serial issuer having been back to market this week with its second CLO backed by project finance and corporate infrastructure loans – the $500 million STWD 2021–SIF2 issue.

The deal is the first CLO to be SOFR-linked across all its tranches, with no additional credit spread adjustment. Arranged by joint bookrunners Deutsche Bank and MUFG – the former being sole structuring agent, lead manager and initial purchaser, and the latter co-manager – the issue comprises: 

  • $293 million of class A-1 floating rate senior notes due 2033 (rated triple-A by Moody’s)
  • $7 million of class A-2 fixed rate senior notes due 2033 (triple-A)
  • $52.5 million of class B floating rate senior notes due 2033 (Aa3)
  • $22.5 million of class C deferrable floating rate mezzanine notes due 2033 (A3)
  • $35 million of class D deferrable floating rate mezzanine notes due 2033 (Baa3)

According to the presale report from Moody’s “At least 60% of the portfolio must consist of project finance infrastructure loans and eligible investments. The CLO permits up to 65% of the portfolio to be in project finance loans in the electricity (thermal) contracted or merchant sector and up to 15% in the oil and gas sector. At least 90% of the portfolio must consist of first lien senior secured loans, cash, and eligible investments, and up to 10% of the portfolio may consist of second lien loans, unsecured loans and bonds.“

Project CLOs - true or synthetic - remain very rare globally and Starwood caused a stir earlier this year when it launched the first US true project deal – the $500 million Libor-linked STWD 2021–SIF1 issue. Pricing on the second deal is tighter than the first for the triple-A tranches, and wider for the double-A and single-A tranches. The triple-A notes sold at 155bp over Sofr, Aa3 at 205bp and A3 at 260bp. The fixed rate tranche sold at 2.7%.

The deal attracted strong demand with many repeat investors from Starwood’s first issue in May. That is no surprise – project finance assets, at least post-construction assets, are de rigueur with investors after proving fairly bulletproof since the start of the pandemic, and project CLOs don’t fall far from that same tree. But whether there will be more demand from potential US issuers is harder to gauge. Logic dictates there should be from investment firms, but there has not been a rush of deals to market since Starwood’s first foray earlier this year.

While the CLO market is long on potential and very short on deal flow, the project securitisation fintech space is even more seminal. Pontoro is planning to scale a digital asset platform that will curate infrastructure project loans from banks into a tokenised and securitised digital asset pool. The scheme is blockchain based and claims to have the potential to significantly reduce transaction times and settlement risk, improve cost efficiency and provide access into emerging digital liquidity pools.

In addition to Dewing, the Pontoro team includes Antony Vitti, former CFO at Peoloton Technoology; Isaac Eleftheriadis, former senior technical product manager at BitGo; advisors Ben Chan, former CTO at, BitGo, Paul Naumann, former managing director at GE Energy Financial Services, Martin Reese, former CFO at InterGen, Annemarie Tierney, former VP at NASDAQ Private Markets, and Paul Atkins, former SEC commissioner.

The success of Pontoro will not rely on finding potential infra investors – appetite is strong and will continue to be post-pandemic – but on project lenders taking up the opportunity to free up cash. If the ambitious plan can demonstrate a benefit to lenders – in short, cheap project loan securitisation – it may prove to be more than an investor-demand-centric idea.


Selected news articles from Proximo last week

NORTH AMERICA

Inglewood issues RfQs for new transit system

The Californian city of Inglewood has issued two separate request for qualifications in support of its Inglewood Transit Connector (ITC) project.

 

EUROPE

Further details surface on Dogger Bank C financing

Further details have surfaced on the £2.9 billion project financing of the 1.2GW Dogger Bank C offshore wind farm, which reached financial close at the start of December. 

 

ASIA-PACIFIC

Bangladesh approves PPP proposal for Dhaka East West expressway

The government of Bangladesh has approved a proposal in principle to implement the Dhaka East West Elevated Expressway project on a Public Private Partnership (PPP) basis.

 

MIDDLE EAST & AFRICA

ACWA signs MOU for up to $2bn of financing from Natixis

ACWA Power and Natixis Corporate & Investment Banking (Natixis CIB) have signed a MOU covering project finance for ACWA Power's projects both in and outside Saudi Arabia.


SOUTH AMERICA

OHLA confirmed for Biobio hospital concession

The award of the $325 million Biobío Hospital Network to Obrascon Huarte Lain (OHLA) has been officially confirmed after publication in Chile's Official Gazette.


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