The Proximo Weekly Digest - Infra Investors: Still Taking The Long Road?

With much of the world in lockdown, the majority of project assets face fallout from counterparty risk, and for those nearing refinancing deadlines the impact of that fallout is amplified. Banks and project sponsors have experienced similar fallout in the project market before. But for many infrastructure investors, the majority of which came into the market in a big way after the 2008 financial crisis in a bid to find better returns, the situation is completely new.

The issue for investors will be how their investments generate enough liquidity to survive the perfect storm. Banks are already feeling liquidity strain as borrowers, irrespective of sector or geography, draw down on pre-arranged and pre-Covid-19 priced overdraft facilities (revolving credits, debt service reserve accounts etc) that would normally remain undrawn – so even if there is some degree of return to normality by the end of the year, the impact on debt pricing for those looking to refinance is going to be felt long after.

On the upside, as noted last week, much of the project sector provides essential infrastructure and the project market is better placed to survive distress than most. As Kroll notes in a recent report (Coronavirus (Covid-19): Questions Regarding the Impact on Project Finance and Infrastructure) “Projects with relatively strong covenants that trap cash and limit shareholder distributions will navigate the storm more effectively than transactions without these features.”

Furthermore, infrastructure operators are finding ways to handle liquidity issues. Auckland International Airport launched a NZ$1 billion ($610 million) discounted equity raising last week. Like all airports, the pandemic has hit AIA hard: three weeks ago it was forced put on hold NZ$2 billion of capital projects, sack 90 contractors, scrap its dividend and put staff on 80% of their wages in order to save cash.

The capital raising is designed to strengthen AIA’s balance sheet even further against Covid-19 fallout. The deal will provide the airport with NZ$1.258 billion of pro forma adjusted liquidity, but even more significantly its successful completion will also enable AIA to take advantage of loan covenant waivers offered by its lenders and extensions to all bank facilities due to mature before 31 December 2021.

Of course, the success of the equity raising is all about confidence and AIA benefits from being an essential infrastructure asset, but its link to the airport’s debt agreements is an interesting twist on the norm and likely to be repeated by other borrowers with a similar asset profile.

But whatever financial survival techniques are employed now by their investments, infrastructure investors will still face a quandary post Covid-19 crisis – do they stay in project sectors hit the most hard by the pandemic, those that have reached their debt limits and limited or cancelled shareholder distributions to survive, or get out at a discount and move on.

There has always been a degree of scepticism in the market about the long-term staying power of funds in the infrastructure space – an exodus expected when higher returns from staples like the sovereign bond market became available again. While non-specialised funds will probably go the route of least resistance if they can, the more sophisticated infra funds, many of which are staffed by ex-project finance bankers, will more likely deliver on their long-term strategies and stay, subject to their powers of persuasion on the funds and investors they manage. Similarly, for those that are well-capitalised and do stay in the market, there are likely to be some major infrastructure bargains on offer once lockdown is eased – a positive at least, albeit one spawned by a negative of epic proportions.

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Selected news articles from Proximo last week

North America
Little Bear solar reaches financial close, Danish funds buy 50% stake
Longroad Energy has announced the financial close and start of construction of 215MW Little Bear Solar projects in Fresno County, California.

Europe
Germany's A3 PPP reaches financial close
A consortium of Eiffage Concessions and Johann Bunte Bauunternehmung has achieved contractual and financial close of Germany's largest motorway infrastructure PPP project.

Asia-Pacific
Jera closes on more coal-fired power project debt
Jera, via special purpose vehicle Jera Taketoyo as borrower, has raised the project debt required to finance its 1070MW coal-fired power project in Taketoyo, Aichi prefecture, Japan.

Middle East & Africa
ResGen shareholders approve Boikarabelo funding package
Shareholders of Resource Generation (ResGen) have voted to approve a ZAR4.2 billion ($230.6 million) debt and equity funding package for the Boikarabelo coal mine in South Africa at an extraordinary general meeting (EGM) held on 7 April

South America
Sonnedix out to banks for two Chilean solar projects
Independent power producer Sonnedix has been sounding out banks since the end of 2019 to structure a debt package for two solar projects in Chile.

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