Answering a funding conundrum

France’s plans to launch a state-sponsored securitisation vehicle for the refinancing of PPP debt post-construction could end up being the long-awaited solution to bring the capital markets back into infrastructure financing. By Bruno Alves

It’s been the Holy Grail of infrastructure financing ever since the global financial crisis reshaped the banking landscape: how to get the capital markets to take over from banks as long-term providers of debt for infrastructure public-private partnerships (PPP)?

The obstacles have certainly been daunting: with the collapse of the monoline insurers, institutional investors, ill-equipped to deal with traditional infrastructure risks like construction, have shied away from entering deals. Then there’s the fact that most PPPs, even those on the receiving end of government-backed revenue streams, are not investment grade material.

Cynics may dismiss PPPs as little more than government gilts after the construction period ends, but institutional investors know that availability payments are tied to certain performance criteria, and, as such, carry their share of project risk.

In France, a new state-sponsored initiative to issue bonds to refinance PPP debt post-construction, combined with the peculiarities of the French PPP market, conspires to put an end to these difficulties.

Government backing

The idea – first proposed by a working group including government representatives, developers and banks like HSBC, Dexia, Societe Generale and Natixis in the summer of 2010 – is straightforward: the government will back the creation of a securitisation vehicle, known as the Fonds Commun de Titrisation (FCT), that will be able to issue bonds to refinance debt once construction on PPP projects ends.

So far, there’s little indication of why such a vehicle would be successful, but it is here that the peculiarities of the French market connive to make the initiative work.

In France, PPPs, the so-called contrats de partenariat (not to be confused with concessions), can access a specific mechanism to facilitate their financing. Known as the Dailly law, named after a French senator, infrastructure developers can, in essence, apply to have the government-backed revenue streams owed them by procuring authorities once construction of a project ends transferred directly to their creditors.

This shifts considerable risk back to the public sector, as it is the procuring authority’s responsibility, prior to accepting this mechanism, to make sure that works have been carried out to pre-agreed standards. More importantly, if there are any penalties to levy on the developer for breaches of contract or other issues, it is the procuring authority that will have to obtain compensation. As far as the creditor is concerned, it deals only with the government entity and its credit rating.

What the new securitisation vehicle is proposing to do is to refinance this Dailly tranche – which can cover up to 80 percent of the debt for PPPs, leaving a minimum of 20 percent of the debt at risk for the developer – after construction ends via bond issues. In this sense, these bonds would be directly backed by government revenues.

This means that the institutional investors buying them will, effectively, hold AAA paper if the payments backing them come from the French state. If the state is not the procuring authority, the bonds will have the same rating as the public entity sponsoring the project.

A source from the finance ministry explains that the securitisation vehicle, which is due to launch by the middle of this year, was born out of the government’s dissatisfaction with the high cost of bank debt: “We are still uneasy with the cost of bank debt, even for projects that are covered by the government’s debt guarantee,” the source reflects.

But banks’ increasing difficulty in providing long-term loans (which might become even more complicated following new regulatory developments like Basel III) also contributed to the initiative’s acceptance among market participants, including the banks themselves. “Bonds have been pushed through by all participants in the infrastructure market,” the source stresses.

Two-stage finance

Jean Rossi, the president of EFG-BTP, a trade body representing French construction firms, neatly summarised the benefits of the securitisation vehicle in an interview with Le Moniteur last November:

“The number of projects banks can tackle today is limited by the amount of long-term financing they can mobilise. The idea [behind the securitisation vehicle] is to divide financing into two stages: construction, the natural province of banks, which can charge higher premiums in accordance to the risks taken on; and the operation phase, less risky and more easily funded by pension funds, life insurers, and those satisfied with lower returns that are guaranteed over a long period.”

Since France’s pensions function on a pay-as-you-go basis, with contributions received paid out almost immediately to fund retiree benefits (as one investor jokingly put it: “Our pensions are like Madoff’s Ponzi scheme – we get the new entrants to pay for the older ones”), it is the country’s life insurers that are set to benefit the most from this initiative. Internationally, pensions that are interested, but so far uncomfortable with funding infrastructure deals, can find much to like here.

With a mid-2011 launch date, the only drawback investors may have to contend with is that, like so many other developments in the French market, the initiative fails to launch sooner rather than later.

French financial instruments: a guide

Following the global financial crisis, France deployed an energetic response to ensure that its PPP pipeline didn’t stop flowing. Even if lengthy procurement processes are threatening to outlive the worst of the crisis, it is worth remembering that investors had access to:

A debt guarantee: Implemented shortly after the financial crisis broke, the government offered a blanket guarantee covering a maximum of 80 percent of the debt used for PPPs up to a total amount of €10 billion.

Projects that choose to use the guarantee mechanism can expect it to add between 75 basis points and 150 basis points to the debt portions it covers. This is determined by five risk categories, each with a 15 basis points interval. Since it is supposed to encourage refinancing as soon as possible, the guarantee only covers the initial years of a concession up to the first refinancing risk.

Originally intended to expire on December 31 2010, its terms were changed to allow it to be applicable to projects that reach financial close afterwards, as long as they were deemed eligible for the mechanism before November 1 2010. The three stretches of high-speed rail currently in procurement, the French Pentagon project (Balard) and a PPP to implement an electronic charging system for heavy vehicles can all make use of the guarantee.

The Fonds d’Epargne: French savings, the Fonds d’Epargne, managed by state-backed Caisse des Depots et Consignations, can be tapped to help finance projects – to a maximum of €8 billion. These savings can fund up to 25 percent of the cost of individual projects and, since they cannot be exposed to construction risk, may be used to refinance debt post-construction.