Best deals in project finance

Global Finance, Jan 2001 by List, Peter

In a radically evolving market nearly all of 2000's best deals in project finance shattered records in terms of size and complexity, not to mention the ability to mitigate risks. A surprisingly high number of the winning deals also set templates for the year ahead.

The power and telecommunication sectors continue to garner most project finance activity. Eight of the top 10 projects globally were telecom or power deals, although many of those transactions-such as the world's largest deal, the $13 billion Taiwan HighSpeed Rail project-were hybrid financings containing elements of both project and corporate finance.

Along those lines, acquisition financing has become a staple in the project finance market and characterizes transactions in many sectors. Other corporate-flavored project finance structures have also increased in popularity. Synthetic leasing, portfolio financing, and the use of commercial paper conduits, most of which premiered in this market around 18 months or so ago, are among the innovative tools that are increasingly used to finance projects. The lines between project and forms of corporate finance have never been more blurred.

"We don't think the lines in project finance have ever been completely clear," says Eric Silverman, global head of project finance at Milbank Tweed Hadley & McCloy in NewYork.The huge costs involved in many recent deals, the difficulty of tapping the market on a nonrecourse basis for as much debt as sponsors would like to raise, and the difficulty of getting investment-grade ratings have all contributed to a shift toward alternative financing modes, explains Silverman."The market wants to look at portfolios of assets, and that requires different structures that include nonrecourse, recourse, and equity, often in combination," he says, adding that over the last year the capital markets have not been a reliable source of this funding, compared with the bank market.

At ABN-AMRO in Chicago, managing director of project finance Joseph Lane says that while banks have provided the bulk of the enormous liquidity demanded in markets over the past year, they increasingly structure deals with short tenors in expectation of a refinancing.

"There's increased focus on the velocity of capital," says Lane. "If banks can hold a deal for a year or two and then refinance, they do.They take those fees and redeploy capital into other projects."

However, one market participant says lenders are finding greater and greater similarities among credits. Given the need to hold diversified portfolios, projects will be under increasing pressure to stand-out. In addition, the ongoing trend of consolidation among banks may reduce the capacity of lenders to finance projects.

Nevertheless, bankers are bullish.

Jonathan Brain, a managing direcfor in project finance at Credit Suisse First Boston in New York, says he expects spreads in the market to shrink over the next year, helping financiers meet the challenge of the market's pent-up demand.

"We're seeing a lot of revolving construction loans, but we've got a backlog, and people are talking about a construction program that will test market capacity," says Brain:

Lane was encouraged by the bank markets' performance over the last year. "Banks have responded in a healthy manner to the needs of capital expenditures taking place in the deregulating power markets in North America," he says. "We're optimistic and expect this trend to continue here and in other markets!

Indeed, the continued torrid pace of deregulation in North America's power market has opened incredibly attractive project finance opportunities. Although there were numerous top contenders for best North American power deal this year, including components of the Edison Mission Energy dealPSE& G, Reliant, Orion, Calpine, Duke, and NRG, to name a few-the $4 billion acquisition of Louisville Gas & Electric (LG&E) by UKbased PowerGen broke records of size and may facilitate further foreign participation in the US market. In addition to size, complexity played a decisive factor in the region's top telecom and transportation and infrastructure deals-the Level 3 telecom financings and the refinancing for Ontario Highway 407.

With critical export credit and multilateral lending agencies' support, Latin America witnessed a slow but solid return to the project finance fold with landmark deals in every sector. For example, Argentina's first public-private partnership in a transportation project led to a financing for the world's longest bridge-the 59-kilometer Rosario-Victoria Bridge Connection.

Western Europe has witness restructuring in its power sector, and the Drax power acquisition and refinancing is, hands down, the most impressive on many levels-size, complexity, and precedents set included.

Project financing in Central and Eastern Europe, with the aid of multilateral lenders and pioneering efforts to navigate through challenging regulatory environments, has resulted in top projects such as Poland's TPSA telecom financings, Russia's Samotlor oilfield rehabilitation, and financing for Bulgaria's Kozloduy nuclear power plant and Sofia's municipal water system.