Project finance loans volumes may have dropped in 2004, but with the market awash with cash and banks eager to lend bigger tickets for the right deals, it was certainly not for lack of trying. Nick Briggs reports.
Project finance bankers spent much of 2004 thinking how to put cash to work in a highly competitive market.
Only 294 project finance loans were signed over the first 11 months of 2004, compared with 346 in 2003 and 436 in 2000.
?There is intense competition for mandates and other lead roles,? says Paul Finn, a syndicated loans director at BNP Paribas in Paris. ?Each region has its local leaders and with the return of the German and Japanese banks the roster of international banks is at full strength. For almost any transaction there is at least one bank ? and usually two or three ? under particular pressure to secure the mandate, whether because of the client, the location, the sector or simply to maintain market presence.?
But despite the eagerness of international institutions to put capital to work, project finance loans volumes reached just $108.7bn during 2004 (up to December 1), down slightly from $112.4bn in 2003.
?In terms of UK private finance initiatives, two years ago there was a tightening of liquidity,? says Colin Holdsworth, global head of loan syndications at Dexia Crédit Local in London. ?Now some banks have come back into the market looking for better yields, so liquidity and competition have increased again.?
Bankers envisage a healthy flow of project financings for 2005 but agree that institutions are likely to be under-lent, just as most were last year.
It's a gas, gas, gas
More and more bankers joined the ranks of those bemoaning finer pricing and looser deal structures as 2004 went on, but the first quarter was a tale of two pipeline projects.
The $1.2bn Mozambique-South Africa gas pipeline, spearheaded by lead sponsor Sasol Polymers and the governments of Mozambique and South Africa, incorporated a R3.8bn ($563m) term loan split into three 12 year tranches. Standard Bank of South Africa arranged and underwrote the first, a R1.5bn commercial bank tranche, Development Bank of South Africa the second, a R1.4bn multilateral tranche, and the European Investment Bank the third, a R900m piece.
|Volume of Project Finance Deals by Region|
|Region||Total ($ m)||Issues||Total ($ m)||Issues|
|Middle East & North Africa|
|Latam & Caribbean|
|Australia & Pacific|
The facility combined a corporate lending structure with the features of a typical project finance arrangement. Sasol backed the project's repayment obligations so it was able to reduce the pricing on the loan, while political risk was assumed predominantly by the lenders and their political risk insurers.
?The Sasol facility brought together mainly African lenders to finance an African project,? says Andy Pheasant, director, natural resources, corporate finance and origination, at Dresdner Kleinwort Wasserstein in London, which acted as Sasol's financial adviser. ?It shows how deals, whether syndicated or not, can be structured for creditworthy borrowers in parts of the world where political risks are a major concern.?
The Baku-Tbilisi-Ceyhan pipeline, on the other hand, was backed by a multinational group of arranging banks, sponsors and guarantors. The $2.9bn investment included $997m of commercial debt split into nine tranches ranging from $30m to $250m.
A total of 15 banks were mandated on the deal with ABN Amro, Citigroup, Mizuho and SG CIB acting as bookrunners.
West meets Middle East
Loans bankers could see the pricing pressure in the corporate loans and leveraged buy-out markets in 2004 but had to wait for confirmation that project finance deals in the Middle East would also become subject to tighter margins and increased competition.
?The year got off to a slow start,? says Annie McMahon, a London-based executive director of syndicated loans at Calyon. ?With few new deals coming to market, there was little chance to see the shift in pricing that was so obvious in the corporate market.?
But in the summer, the additional financing for Oman LNG and the deal for Qatar Gas II showed that downward pressure was hitting the project finance market as well.
?With many banks behind on their budgets there was little choice but to accept the lower returns,? McMahon continues. ?Many were prepared to commit for bigger tickets than we had ever seen before.?
ExxonMobil and Qatar Petroleum are sponsoring the $5bn project, and lenders for the $1.5bn 15 year loan were offered tickets of $75m or $100m. Most opted to lend $100m or more, and the 36 banks that signed in at the senior level in mid-December raised $3.6bn.
The margin on the secured commercial debt is 50bp over Euribor during construction, rising to 100bp during operation.
?Everyone focused on the size of the deal, which meant it was cheap but not too cheap,? says Simon Jackson, co-head of loans syndication and placements at SMBC in London.
Elsewhere, a $976m facility for Egyptian LNG, fully underwritten by its 12 mandated arrangers, was signed in June. When the deal was launched in 2003, bankers suggested the financing's 15 year maturity was a problem, but concerns over tenors appear to have diminished.
?On [Middle East] power projects we are back to the pricing levels seen before 2002, but for LNG deals we are in new pricing territory,? says Calyon's McMahon. ?Banks have really been beating each other up.?
The $688m syndicated loan for the Omani Qalhat LNG project, which pays a pre-completion margin of 40bp over Libor, will explore that territory further this year.
?The deal is being underwritten rather than being done by one bank on a best-efforts basis, or being clubbed to death,? says one loans banker. ?Banks will probably be looking to scale their $100m contributions down to between $50m and $65m. That represents a finite risk and it could herald the return of some underwritten deals with smaller MLA groups.?
A banker at one of the deal's mandated arrangers expects the loan to require a wide syndication, which will make it the first test of retail market demand for finely priced LNG deals in 2005.