dla piper roundtable
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Presentation to DLA Piper Global Roundtable, June 2008TRANSCRIPT
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DLA Piper Infrastructure Roundtable
Michael WilkinsDirector, International Project Finance Association
June 26, 2008
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Infrastructure: the story so far…
• 2006: $342 billion invested in infrastructure deals worldwide
• 2007: $322 billion invested, despite turn in the credit cycle
– Infrastructure acquisitions = big growth area in syndicated loan market
• 2008: Deals still being done & infrastructure funds still being raised
FSTA Pennsylvania Turnpike Airtricity
£2.5bn £1.1bn £7.3bn
Soaring levels of M&A activity
Driven by asset hungry infrastructure funds
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The flight to quality
• Infrastructure funds have become beneficiary of the credit crisis
• Global Infrastructure Partners, backed by Credit Suisse & GE, raised $5.6bn
• Morgan Stanley backed fund raised $4bn
Combined demand for funds approx. $4bn more than expected
• Investors attracted to unique characteristics of infrastructure:
• Essential and long-term nature
• Strong competitive position
• Stable, predictable consumer demand and cash generation
• Low correlation to equity markets and other main assets therefore provide valuable diversification
• Assets ideal match for wide range institutional investors needing long-term, inflation-linked cash-flows
Pension funds
Insurance companies
All attractive in face of economic slowdown
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The rise of infrastructure funds
2004: - 4 funds = $1.4bn
2006: - 20 funds = $16.6bn
2008: - 5 funds = $13.2bn
- 58 funds = $79bn in pipeline
Funds outperforming market:
First State Global Infrastructure fund 7.7%
Macquarie Global Infrastructure Securities is up 4.4%
FTSE All-Share Index 1.4%
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What are funds looking for?• Recent movement towards blending traditional and new
financing solutions by sponsors
– Providing sophisticated financial products to demanding investors
– Increasing overall leverage
– Optimizing sponsor’s returns
Strong business profiles/robust cash flows of infrastructure assets
Strong covenant packages, supportive structural features
Allow infrastructure assets to be more highly leveraged at investment-grade credit quality
But leverage has reached unprecedented levels
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Valuation trends
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Valuation trends 2
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Infrastructure finance boom
Global Infrastructure Volumes: record figures 2006 &2007
Source: Thomson Financial
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2008: Over leveraged?
Infrastructure finance boom
Favorable debt terms traded v.s. the management of credit risk
Now the in the global credit markets
Leveraged infrastructure loans left paralyzed under current market conditions &
purchasers unable to refinance acquisition facilities
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Case study: BAA
• Ongoing delays in the refinancing of legacy bonds & acquisition
debt
– Delays to the execution of a sustainable long-term financing solution at a
time when consolidated liquidity and undrawn facilities are starting to
tighten
November 21, 2007: Corporate credit ratings lowered to ‘BB-’ from
‘BBB+’
April 16, 2008: Ratings on bonds lowered to ‘BBB-’ from ‘BBB+’
• All ratings on CreditWatch Developing
– S&P may raise, lower, or affirm the ratings.
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Credit issues & risks
Public policy issues • Infrastructure companies are being taken private – proving
detrimental to credit quality
Escalating acquisition prices have impacted credit quality• Valuation multiples & special dividends
• Equity shares
Increasingly aggressive balance sheets to fend off threat of acquisition• Exemplified by BAA’s defence tactics (although unsuccessful!)
• Offered special shareholder capital return in 2007 of £750 million
Term “infrastructure” being stretched to accommodate appetite• New assets being labelled infrastructure, but lacking key
characteristics (car parks? ferry companies? service stations?)
New financing structures • Increasing leverage at expense of creditor protections Fusion of leveraged finance and infrastructure finance
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Growth of hybrid structuring techniquesTo finance increased asset valuations
Leveraged Finance + Project Finance
“Infrastructure Acquisition Finance”
Cheaper debt and softer terms
But is there more risk…?
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The need for sensible lending
• Volatile credit markets now making financing more difficult
– Cost of borrowing increased
– Returns to shareholders decreased
• Infrastructure funds need to attain strong credit quality to
encourage sensible lending?
Quality of asset
Quality of cash flow
Appropriate financial structure
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Infrastructure performing well
• Despite current turmoil…
– Monoline meltdown
– Lack of lending & liquidity
• Infrastructure credits performing well
– Corporates operating as expected
– Servicing debt appropriately
• But weak covenants mean only time will tell if credits will crash
– Restructuring to avoid default
• Credit quality determined by:
Quality of assets Quality of cash-flow
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