T
hroughout the world, governments have embarked
on major infrastructure investments following the
global financial crisis and the resultant economic
downturn. These initiatives are designed to cushion,
if not reverse, the rapid slide into economic recession.
Governments are also attempting to fill the gaps that have emerged
as banks, other financiers and major equity investors turn off the
funding tap for many infrastructure projects.
‘Locally, the time is ripe for the injection of fresh life into South
African infrastructure investment, but borrowers will have to
start looking beyond the banks to alternative sources of funding,’
says Richard Roothman, head of Banking and Finance at
Werksmans Attorneys.
‘Project bonds, an asset class that is still untapped in this country,
could be a viable alternative means of financing infrastructure
projects,’ Roothman suggests. ‘These bonds allow access to large
international pockets of non-bank money and could potentially fill
some of the gaps being left by international banks scaling down
their involvement in the project finance arena.’
One potential benefit of project bonds is that they can enable the
finance recipients to have more of a hand in the financing strategy
than is often the case, particularly when funds are sourced from the
international community.
Project bonds are typically debentures used to finance project
and infrastructure transactions, and are issued with a long maturity,
usually longer than 10 years. This is in contrast to the tenure of
five to seven years for corporate bonds and bank loans, the more
traditional means of financing projects.
Roothman says the tenure of project bonds would not appeal to
all investors, specifically to those with an appetite for long-term
investments, notably pension funds and insurance firms.
PROJECT BONDS ADVANTAGEOUS FOR BORROWERS
AND INVESTORS
At this particular juncture, project bonds could be advantageous
for borrowers and investors alike as the capital markets are not
contending with the same cost and regulatory constraints as the
banking sector.
‘Banks need to bear higher liquidity and capital holding costs as
a result of Basel III, and this has pushed up the cost of lending,’ says
Roothman. ‘Additionally, faced with the Eurozone crisis, European
banks’ credit committees have less appetite and are taking a much
more conservative approach towards long-term lending.’
While the position of South African banks is more positive, local
banks have a clear preference for shorter-dated assets, typically of
five to seven years’ duration, and so are less likely to step into the
funding gap left by international banks.
‘Also, the funding available from local banks may be
stretched because of demand for financing from bidders in the
renewable energy programme for independent power producers,’
Roothman says.
The state-owned Industrial Development Corporation (IDC) may
have provided a glimpse of things to come when it raised five billion
rand for the funding of renewable-energy projects by selling bonds
in a private placement to the state pension-fund manager. The bonds
are to be paid in tranches over 14 years as the projects progress.
‘As an alternative source of funding for capital-intensive projects,
project bonds are well worth looking at,’ he says. ‘They have been
used successfully in markets such as Europe, Latin America and
the Middle East. In South Africa, if transactions are properly
structured to address the issue of construction risk, there should be
significant potential and appetite for project bonds among investors,’
Roothman adds.
Construction risk refers to the initial period in which the project
is built or constructed, usually the first three years, when the risk to
investors is highest because no cash flows are being generated yet
and construction could be delayed for a wide range of reasons or
ultimately fail.
Roothman says investor concerns about construction risk can
be addressed through upfront credit enhancement in the form
of subordinated debt, or through guarantees from third parties,
whether government or development finance institutions.
ACCELERATING GROWTH
‘I think there is a place in South Africa for project bonds. The
expertise is available, there must be appetite and there is certainly
a need for alternative sources of project finance provided that the
bonds are structured in such a way as to minimise investor concerns.
Project bonds could supplement existing infrastructure funding and
help deliver the growth boost for which politicians and economists
are looking at infrastructure investment to deliver,’ states Roothman.
‘The question is: who is going to be first to test the waters?’ he
says in conclusion.
Edition 5
BANKER SA
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