How to deal with diminishing projects in Europe

With new PPP-type infrastructure projects having become ‘scarce’, John Mayhew, head of infrastructure debt at M&G Investments, is originating deals in the secondary market.

M&G Investments, the London-headquartered investment manager, has begun acquiring project financing loans from banks, given the greater scarcity in a new deal flow.

In June, Japan’s Dai-ichi Life Insurance disclosed an anchor commitment of £70 million (€78 million) to M&G Infrastructure Loan Fund. According to a statement from the life insurer, the fund is targeting project finance loans and bonds for public-private partnerships (PPP) and infrastructure projects in European countries. As a managing director at an infrastructure investment firm who attended the 2018 Infrastructure Investor Forum in Tokyo told PDI, availability PPP-type deal flow is limited, and there are political risk factors in the origination process.

As the opportunity set for investing in new PPP-type infrastructure projects is ‘scarce’, the investment manager has been acquiring project financing loans from banks, according to John Mayhew, a London-based head of infrastructure finance at M&G Investments.

Notably, the first investments that his team made for the loan fund have all been secondary transactions. “It is a movement [of loans] from banks to the fund,” Mayhew added.

He noted that in addition to working with banks and advisors, conversations with shareholders also lead to potential deal flow from bilateral negotiations by recognising common interests among stakeholders.

According to Trends and Opportunities in the European Infrastructure Market written by Allen & Overy, a London-headquartered law firm, shareholders for PPP- type projects typically include contract counterparties, government, equity holders of a special purpose vehicle (or a project company) and lenders.

According to the law firm, international lenders and sponsors have broadly the same perspective: to develop a successful [PPP-type] project in an environment of contractual and legal certainty. For lenders, a successful project means a visible repayment of the debt up to 70 percent of the project cost.

In addition, the proportion of infrastructure spending across European countries is projected to decrease, according to McKinsey Global Institute’s discussion paper.

A part of this paper, Bridging infrastructure gaps: Has the world made progress?, indicates that the proportion of aggregate infrastructure spending in Europe is estimated to be down to 10 percent of that of global spending and decreased to four percent in Eastern Europe, during a 19-year projected timeline from 2017 to 2035, at constant 2017 prices, while the historical infrastructure spending across the European region was accounted for 20 percent of global total infrastructure spending for a 15-year period from 2000 to 2015.

According to Mayhew, there is less of a pipeline in greenfield debt projects compared to the 2000s. Now, he sees more refinancing deals, including infrastructure corporate refinancing and refinancing of existing project debt facilities upon completion of construction.

Another trend that he sees is floating rate structures among loan funds. “Most of the market was listed debt with investment-grade ratings. Those deals were dated back in the late 90s and 2000s. The focus was on inflation-link and fixed rate [structures],” he noted.

M&G Infrastructure Loan Fund has been fundraising since March, targeting over €280 million, according to PDI data. The fund will invest in overseas infra-related project finance loans and bonds, which are mainly for railways, schools and hospitals in European countries, the statement from the Japanese insurer shows.

M&G Investments managed over £58 billion of debt across infrastructure assets in both public and private markets, according to a public disclosure as of 31 December 2017.