If the banking crisis was a big hiccup for project finance, then the economic instability it has spawned, culminating in heightened worries over the sovereign debt of eurozone countries throughout 2010, has been a nightmare. In few places has this been felt as acutely as in Spain.
One of the deepest recessions in decades forced Spain to cut public spending, causing new infrastructure projects run by central and regional governments to be slashed. By coughing up an extra Eu500m in its budget, the transport and development ministry saved 50 projects from the scrapheap in August but close to 200 road and rail projects had already been suspended for up to four years.
Private sector involvement, meanwhile, was already severely crippled by the financial crisis as banks avoided long-term and large-scale project finance lending.
Alongside the pain in infrastructure financing, regulatory uncertainty in Spains renewable energy sector created a complete standstill as domestic and international investors refrained from participating in new ventures, unsure as to how energy tariffs would be modified and subsidies cut.
So should we be surprised that project finance bankers say they have had a great year? In terms of projects completed, it has been, says Daniel Tixeront, managing director of project finance at Société Générale in Madrid. This, he says, is down to all the refinancing and restructuring, "which has provided us with a number of opportunities very different from one another."
It is a backlog of old projects, which hit financing problems as the credit crunch bit, which are finally moving along and providing banks with something to get their teeth into. "We havent seen too many new money transactions, partly because there has been uncertainty surrounding the governments investment plans," says Tixeront. "We have been concentrating on closing deals launched a year ago."
But although some deals have been slow to get off the ground, there have been some notable successes. Carlos Fernández Almazán, head of infrastructure project finance at BBVA in Madrid, highlights the funding behind sections of the new Line 9 of Barcelonas Metro network as one of the more interesting ones to be completed this year. A Eu1.1bn 26 year commercial loan portion of the Eu2.5bn public private partnership was signed in July, also making it one of the bigger facilities of the year.
Several road financings have also happened, with the Eu230m expansion of the A-21 motorway in the north of Spain, (the Autovía del Pirineo, or the highway of the Pyrenees) reaching financial close in May.
No single project has been straightforward, however. As Tixeront highlights, every bank has its own limitations, and lending appetite varies enormously from one to the next. Pricing and maturities remain a hurdle, with some domestic and international banks still struggling to commit capital long-term without returns that are simply too taxing for project sponsors.
This situation, which has sharply reduced the pool of players in Spain, is unlikely to improve for a while yet.
"It will be difficult to go back to the price levels of two or three years ago," says Almazán of BBVA, adding that in the medium-term, prices will stabilise. Margins on most projects revolve around the Euribor plus 250bp-300bp mark, a far cry from the double-digit figures sponsors could secure for projects three years ago.
Tixeront calls the execution of each transaction "strenuous", even quality deals with quality sponsors.
"Spanish banks have issues they didnt have before, and some foreign banks are still not present," Tixeront says, alluding to a withdrawal of foreign lenders from Spain which has yet to be reversed. "The impact has been most noted on the documentation phase. Drawing up the intercreditor agreement can take a very long time."
Project bond hopes
Lending restrictions may have provided the impetus for one of the biggest recent innovations in project financing, however. Banks are working on what could result in one of the first project bonds to refinance the construction of a toll road running through the south of Spain, the Autopista del Sol.
Interest from infrastructure funds and institutional investors is high, bankers say. The launch of any deal will depend on how investors respond to new issues by the Kingdom of Spain and how much further capital markets re-open to corporate borrowers, after a tumultuous year for Spanish issuers, when yields rose sharply. But project finance specialists in Spain have their eye on longer term use of a product which has rarely been used in this sector before."We have to find the right place for everything," says BBVAs Almazán. "Classic project financings will be good for greenfield projects. For brownfield projects, bonds may be the right product."
Cuts debate centred on PV tariff changes
Moreover, the prospect of retro-active cuts to so-called feed-in tariffs, which guarantee wholesale prices for renewable energy, has reportedly re-emerged in draft legislation being considered by the Comisión Nacional de Energia, which would stop solar projects receiving feed-ins 25 years after construction.
Investors are less worried by the effect of cuts to future PV projects, and hope further regulatory clarity will allow these to get underway again.
"These [cuts] are totally expected as future projects will have lower costs to build," said Peter Rossbach of alternative energy investor Impax Asset Management, speaking in July as the debate around cuts raged on.