Best banks in project finance 2002

Global Finance, Oct 2002 by Platt, Gordon

Global Finance selects the winners in a specialized area of finance where the risks can be high, but the rewards are commensurate. * By Gordon Platt

PROJECT FINANCIERS ARE LIKE swat teams that put on protective armor before going into action, says Chris Beale, a managing director and global head of project and structured trade finance at Citigroup. "Sure we take risks, but we know what we are doing, and we are prepared," Beale says. "If you are going to a dangerous neighborhood, you take precautions.We do a lot of analysis, and create structures to mitigate risks.'

Project finance may be complicated and risky, but the results are better than plain-vanilla corporate lending, he says. "In the past year, we have seen a lot of big companies disappear," he adds.

Citigroup once again is this year's winner of Best Global Bank in project finance, as well as Best Global Power -Bank, and it takes home the top honors in North America and the Middle East and Africa, as well. The bank is leading an industry effort to convince global regulators at the Basle-based Bank for International Settlements not to penalize project finance as a risky business that would require banks to make higher capital charges. Earlier this year it looked as if Basle II, the New Basle Capital Accord coming into force worldwide in 2005, would be lifethreatening to the project finance industry, according to Beale.

"But we think we have made an impression on the Basle Committee [on Banking Supervision] with our study of default rates, which shows that project finance loans performed better than corporate loans," he says. The study was done in conjunction with New York-based ratings agency Standard & Poor's. Citigroup, along with ABN AMRO, Deutsche Bank and SG, together representing 24% of the market, submitted 15 years of data to the Basle Committee to prove their point, Beale says, and additional banks will join in the study.

Bankers insist that the transparency of project data enables them to build financial models with "what if" conditions that allow them to size debt to account for business fluctuations. Nonetheless, analysts point out that in non-recourse lending the risk is on the banks that put up the money and not on the project sponsors.

"It is becoming increasingly common in the important power sector in the United States for banks to require power-purchase agreements to be signed before financing is forthcoming," says Roberto Castiglioni, analyst at London-based Dealogic ProjectWare, which maintains a global database covering project finance transactions.A lot of work goes into a project to ensure that it will produce the anticipated cash flow, Castiglioni says, but overall risk varies by sector and region. "It is impossible to generalize about the risks involved," he says. "If a project is nearly complete, the assets could be sold to cover borrowing costs. But if a project is at an early stage, all you have is a hole in the ground."

There has been decreasing activity in project finance this year, especially in the United States, where banks that had big exposure to Enron are no longer willing to participate in the market, Castiglioni says. Once the largest energy trader in the United States, the collapsed Enron had interests in utilities, power plants and energy projects around the world.

Now that the telecom sector has faded, power projects are the mainstay of the project finance market. Even though power-sector volumes fell 50% in the first half of 2002 compared to the same period last year, the sector accounted for $13 billion of deals closed, according to Dealogic ProjectWare.There were only $6 billion worth of telecom projects in the first six months of 2002.

In selecting the Best Project Finance Banks, we considered the banks' quantitative performances over the past year, as well as subjective criteria, such as innovations in doing deals and the strength of the banks' project finance teams.

GLOBAL

CITIGROUP

Citigroup's worldwide operations make it the only truly global participant in project finance, where it holds a big lead in the deal numbers, as well as in the talent required to create better ways of doing business. With offices in 102 countries, the bank has used its extensive local presence to execute an increasing proportion of financing in local currencies. For example, Citigroup was the first bank to use local-currency bonds to finance a power project in Malaysia, a $ 300 million Islamic financing for a gas-fired power plant owned by Malaysian power company Malakoff

Citigroup is the only bank to lead globally in project finance loans, bonds and advice, all in the same year.The bank arranged more than $5 billion in project finance deals that were closed from June 2001 to June 2002, ahead of second-place WestLB, which arranged $3.6 billion, according to Dealogic ProjectWare. Citigroup was a mandated lead arranger for a $1.6 billion loan to finance construction of the Shuweihat power and water-desalination project in Abu Dhabi, the largest project of its kind.