Energy & Infrastructure Insight - Issue 2

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FLEXIBILITY Flexibility offered by different sources of liquidity is a key focus for infrastructure sponsors and the discussion tends to focus on a few key areas: Capex On most multi-creditor platform deals, the capital expenditure needs of the business are supported, in part, through a revolving credit facility from a bank or syndicate of banks. As this facility is used, it can be cleaned down through a private placement restoring it for further capital expenditure. Such facilities are expensive to put in place for more than seven years; an issue that affects bank funding generally. It is, however, common to 'amend and extend' such facilities as needed. Infrastructure sponsors tend not to fund capital expenditure directly with institutional debt given that investors tend to offer less flexible drawdown terms. In the context of capital expenditure where delays can mean that funding is not required when initially envisaged or is required earlier if a particular issue occurs, flexibility is key. That being said, in the U.S. market, the drawdown profile is often more flexible given the lack of need for swap indemnities (for U.S. investors). For those U.S. investors that are natural lenders in currencies other than U.S. dollars, there is now a push from European sponsors for U.S. investors to offer the same flexibility on European projects. 8 KEY TRENDS IN THE INFRASTRUCTURE INSTITUTIONAL FUNDING MARKET INFRASTRUCTURE SPONSORS' NEED FOR A RELIABLE SOURCE OF LONG-TERM FINANCING HAS LED TO A WEALTH OF OPPORTUNITY FOR INSTITUTIONAL DEBT INVESTORS IN THE US AND EUROPE TO INVEST IN A VAST ARRAY OF STABLE, HIGH-QUALITY ASSETS. WHILE BANK DEBT REMAINS AN IMPORTANT PART OF THE FUNDING MIX FOR INFRASTRUCTURE SPONSORS, THE INSTITUTIONAL MARKET IS BECOMING INCREASINGLY ATTRACTIVE IN OFFERING LONG-TERM FINANCING AT COMPETITIVE RATES. THIS ARTICLE WILL LOOK AT SOME OF THE KEY TRENDS IN THE US AND EUROPEAN INFRASTRUCTURE INSTITUTIONAL FINANCE SPACE AND DRAW OUT SOME OF THE KEY MOVEMENTS IN THIS EXCITING AND RAPIDLY CHANGING ENVIRONMENT. Pricing Locks Infrastructure sponsors are also keen to lock in rates at pricing for as long as possible before closing and funding occur. In both the U.S. and European market the "3 for free" rule has long been the norm (i.e. three months without the rate needing to be revised or having to pay to maintain the rate lock). However, infrastructure sponsors in both markets are pushing this further and some sponsors have reported being able to lock in rates for up to two years. Ratings A key difference between U.S. and European investors is the need for a rating. Due to NAIC rules, U.S. investors (in particular insurance companies) often require a rating before they are able to invest, although there are exceptions to this rule as evidenced by a number of USPP issuances for European infrastructure projects that were made without a rating. Maintaining or obtaining a rating does not only allow a wider field of U.S. investors to be involved in a transaction thereby expanding infrastructure sponsors' funding pool, but can also provide infrastructure sponsors with added flexibility for example when linked to portability. It should also be noted that there is now increased competition for the "Big Three" rating agencies in the form of DBRS and Kroll who are often included on transactions as rating agencies from whom a rating can be obtained. For the purposes of the NAIC rules in the U.S., both DBRS and Kroll are a "nationally recognized statistical rating organization".

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