Proximo Weekly: Project finance volumes not lagging or sagging – yet
2022 was a good year for project finance volumes according to Proximo’s new Project & Infrastructure Finance Report. So will the same trends and deal flow continue for the remainder of 2023 and beyond?
Project finance market sentiment is a complex stew whose ingredients include interest rate levels, commodity prices, the extent of available government support and regulatory conditions. Even where it is possible to divine the mood in credit markets, the time it takes to agree, document and close project finance transactions means that financing volumes are often highly lagging indicators.
But with all those caveats out of the way, 2022 was by any measure a very good year for the project finance market. Volumes, according to Proximo’s just-published 2022 Project & Infrastructure Finance Report, increased from $317 billion to $432 billion between 2021 and 2022. Taking the broader definition of infrastructure finance, which includes corporate and sovereign financings for infrastructure projects, volumes increased from $367 billion to $579 billion over the same period.
It would be hard, based on those volumes, to discern any immediate aftereffects of COVID or the Russian Invasion of Ukraine. While sanctions have put an end to the financing of big-ticket Russian oil & gas projects by export credit agencies and international commercial banks, other jurisdictions have generally compensated with big ticket financings of their own.
Inflation, largely the result of higher commodity and labour costs, is causing anxiety among developers, and will eventually feed through into offtake prices and eventually financing costs. But the 2022 crop of deals generally were financed based on construction costs that were locked in before the recent unpleasantness.
Two other factors – both positive – will probably need a little bit of a lag before they feed through into financing activity. The first, a general increase in oil & gas prices, will not have fed through into final investment decisions and financing activities within the space of 12 months. The second, the effects of the two blockbuster US infrastructure acts – the Inflation Reduction Act and Infrastructure Investment and Jobs Act – also needs a little more time to bed down. There’s still a little work to be done on developing the financing structures to most effectively exploit the IRA’s tax incentives.
But unsettled credit market conditions in 2022 did not generally deter commercial banks from closing financings across sectors, though bankers in the latter part of the year did report greater struggles in placing deal contingent and other interest rate swaps with large investors.
Some US lenders are still wobbling in the aftermath of the collapse of Silicon Valley Bank - and there may be further restrictions on the ability of deposit-funded US banks to acquire long-dated assets like project finance loans. But US banks are primarily active either in market niches or in capital markets products like bonds and B loans. Three US lenders appear in the top 15 power and renewables lenders globally – though none in the top seven. But there are no US banks in the top 15 for the combined transport, social and digital infrastructure super-sector. European and Japanese banks continue to dominate both sectors.
So what did drive lending activity in 2022? The first factor was an increase in big-ticket deals. Fully 57% of all volumes came from deals of larger than $1 billion in size. Average deal size increased from $407 million to $460 million.
But the strong performance of jumbo transactions did not mostly come from the usual suspects – oil & gas and offshore wind projects. Offshore wind had a comparatively subdued year, and while LNG performed solidly it was broadly in line with the trend of recent years.
The break-out stars were power transmission lines – in Europe and the Middle East primarily – and digital infrastructure. In transmission a small number of large one-off financings mean that conventional power, the sector in which they are counted, maintained overall volumes even as coal- and gas-fired power volumes slid.
The Proximo perspective
It would be dangerous to read from this an imminent boom in project financed investments in the backbone of the energy transition. Several of the large utilities that will be building out this capacity have a preference for using balance sheet financing. The permitting process for transmission assets – whether inter-state or cross-border – is very time consuming. But confirmation of bank appetite for these assets is at the very least reassuring.
Digital infrastructure is much more likely to be a consistent secular trend. Some of this may be down to banks cannily rebranding existing corporate, leveraged or real estate lending as project finance loans to digital borrowers. And some of this, like renewables, will be down to refinancings and M&A-driven activity.
But the $61 billion in digital infrastructure activity in 2022 includes a respectable amount of investment in European fibre networks, as governments push for greater penetration in rural networks, and existing operators expand aggressively into new markets with higher-bandwidth offerings.
If 2022 had any coherent story it was perhaps the continuation of pent-up momentum coming out of the COVID-19 pandemic, though that explanation is probably frustratingly vague.
The struggles of SBV and Credit Suisse will be another chance for non-bank lenders – a group that now includes bond investors, private placement providers, generalist infrastructure funds and specialist project debt funds – to set out their stall. Funds that can mimic the benefits of bank financing in terms of staggered draws and flexibility – now grouped under the umbrella term private credit, will hope that nervous depositors will achieve what successive tightenings of the Basel regulations have so far failed to achieve – a bank retreat from long-dated illiquid project finance lending.
But banks have so far shown themselves to be tenacious and liquid in defending their franchise in energy and infrastructure lending. While 2023 probably should give the market hints about how the big trends in infrastructure investment will play out in credit markets, banks are probably still the anchor of the project finance market in the medium term.
Selected news articles from Proximo last week
X-energy seeks Kexim finance for Xe-100 SMR
US-based X-energy reactor company is in talks with the Export-Import Bank of Korea to explore project financing opportunities for the deployment of its Xe-100 advanced small modular reactor.
Further details on Moray West project financing
Further information has come to light about the project financing of the 882MW Moray West offshore wind farm, which will be located off the coast of Scotland.
Hai Long Offshore advances towards financial close
The Hai Long Offshore Wind Project team will take the lead on reaching financial close after the contract with financial advisor Cathay United Bank expired.
EWEC receives two proposals for WtE project
Emirates Water and Electricity Company (EWEC) and Abu Dhabi Waste Management Company (Tadweer) have received two proposals for a waste-to energy project (WtE).
SOUTH AMERICA
Copasa and Espinia sell Uruguay road concession
Copasa and Espina have sold a 100% stake in the Circuito Vial 3 concession to a consortium of abrdn and Bestinver for an enterprise value of €213 million ($233 million).
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