While the Australian market has a track record of supporting good projects, project sponsors are increasingly focussed on the availability of alternative debt-market products, particularly those that offer longer tenors and therefore increased funding certainty over the life of the project.
"There is some appetite for a local alternative to the bank market to better manage refinancing risk and to create a wider variety of funding sources."
Martin Irwin, Partner at Baker & McKenzie
This is evidenced by the ever-increasing number of project and infrastructure-related borrowers accessing the US debt capital market. Some of the names to utilise these markets in 2015 include Fortescue, Hallet Wind Farm, NSW Ports and Transurban; a diverse mix of mix of asset classes and credits.
Recent developments, in particular the strong return of Australian dollar tranches and the opportunities arising from the refinancing of billions of dollars of acquisition debt to be raised in connection with the current infrastructure asset sales are only likely to accelerate this trend.
However, the US capital markets may not be for all borrowers given their relative unfamiliarity to many corporates, currency swap issues and relatively high transaction costs. So is there a role for an institutional debt market in Australia?
Baker & McKenzie Melbourne recently hosted an International Project Finance Association event in Melbourne, which included Andrew Pickering from Infrastructure Capital Group as key note speaker and, as panellists, Robin Dutta from ANZ, Paul Crowe from Plenary and from Ross Pritchard of Hastings Funds Management.
The panel sought to draw out the market appetite for the emergence of an Australian institutional debt market and how this may occur.
The clear consensus to emerge from the discussion is there is, at least on the sponsor side, some appetite for a local alternative to the bank market to better manage refinancing risk and to create a wider variety of funding sources.
However there is a recognition this is unlikely to emerge in the short to medium term given the range of impediments that exist.
Some of these impediments, while difficult, are solvable in the right circumstances or with the right will.
Examples include the problem of pricing long-term debt in the absence of benchmark yields from long-term Commonwealth government bond issuances and the perceived lack of depth of credit resources and expertise within institutional investors to analyse complex risks and transact in a competitive timeframe.
Another issue is the structural impediments to the participation of the Australian super funds. For instance when the asset allocation of a fund is broken down into its component parts there is likely be relatively small amounts available for investment in infrastructure debt. This is unlikely to change given the liquidity requirements of the Australian funds.
Notwithstanding this, some funds are clearly looking to move into the space. One example is REST which, through its SuperInvestment Management arm recently completed a $200m private placement to Transurban.
The challenge is for sufficient momentum to be created to encourage the further investment of resources and expertise needed to create a functioning market.
It seems likely therefore banks will continue to dominate the infrastructure market for the foreseeable future. This outcome does not need problematised given the significant amount of value in the expertise, flexibility and support that a relationship bank led bank group can provide to a project.
However, relatively short loan tenor's with the consequential refinancing risk, a specific feature of the Australian market post GFC, is a risk which is increasingly being sought to be removed rather simply managed or mitigated by sponsors.
Foreign investors in particular are less willing to take a view on the capacity of the local market to adequately absorb the refinancing task each year.
The solution to overcoming refinancing risk however may not necessarily lie only in the US capital markets or the development of an Australian institutional debt market. It may also be addressed by changes to the bank market, as shown by the 20-year debt provided by two European relationship banks of the sponsor Neoen to the Hornsdale wind farm.
Martin Irwin is a partner at Baker & McKenzie
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
21 Aug 2015
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