Competing or complementary?

When it comes to infrastructure debt, the consensus is that banks and institutional investors are more likely to be collaborators than bitter rivals.  

A conversation focusing on infrastructure debt is bound to touch on the role and presence of banks within project finance sooner or later. In the case of Infrastructure Investor’s Debt and Project Finance 2015 Forum, which took place in Berlin this week, the topic was breached early during the morning keynote presentation, sparking a debate that carried over to several subsequent panel discussions.

Until a few years ago, banks dominated the project finance sector. Had it not been for the Basel III regulations, banks may not have taken a step back, allowing institutional investors to step in and fill the resulting gap.

“The way I look at it is ‘the genie has escaped the bottle […] and he can’t get back in’,” Hastings Funds Management’s executive director Steve Rankine said, noting that in his view more investors will enter the sector as they are drawn to three primary characteristics: its ability to serve as a long-term cash flow hedge, its favourable risk-return profile, and its capacity to serve as a good diversification tool.

 Banks on the other hand, while relevant to the sector and reluctant to exit it, will probably concentrate on short-term lending.

“Where we see the market going is banks will exit completely over the long term from the long tenor part of the market and what you’ll see is institutional investors that will come and replace that role,” he said.

The first dissenting voice came not from a bank but from Robin Burnett, senior director, infrastructure ratings at Standard & Poor’s.

“Whilst capital is more restricted – that is true because banks have no choice – leading project finance banks are still ready and willing to lend for quite long tenors and in many cases effectively to match institutional investors,” Burnett said.

In his view, banks and institutional investors are not on opposite sides but rather complementary to one another. Burnett has seen a trend of more partnerships between banks and institutional investors emerging, particularly for larger transactions where capacity is an issue.

Andrew Blincoe, head of infrastructure and structured corporate financing at RBS, said: “I think our [bank’s] role has been providing intellectual capital as well as economic capital and helping our issuers intermediate or access different sources of capital.”

Should Burnett’s assessment be accurate, it can only be good news for project sponsors or anyone looking to raise a debt fund since it would mean a greater choice of capital sources.

One thing Forum attendees did agree on was the likelihood that investors would be increasing their target allocations to infrastructure debt in the next 12 months. The vast majority of respondents (85.3 percent) participating in a live poll conducted during one of the sessions, expected institutional investors to increase their allocation to the asset class, while just 2.4 percent expected a decline.

How this bulging appetite will reconcile with what many participants at the Forum described as a lack of supply will no doubt have repercussions that will continue to be a Berlin talking point in years to come.