The feared “refinancing wall” – the gazillions of infrastructure-related debt that needs refinancing over the coming years – is surely enough to leave those affected in a state of wild-eyed panic, no? Maybe it would be so – if it weren’t for the fact that, at the moment, those seeking refinancings are not so much shoulder-charging a wall as pushing lightly against an open door.
Appetite from the bond – and, perhaps more surprisingly from the banking market as well – has ensured that a steady succession of refinancings of infrastructure assets have taken place recently.
One of the more notable was Southern Water, the UK water and sewerage company that was bought by a consortium of infrastructure investors for £4.2 billion (€4.8 billion; $6.8 billion) in October 2007. The consortium was led by JPMorgan Asset Management, which took a 32 percent stake, and included Challenger Infrastructure Fund (27 percent), UBS (18 percent), a collection of seven Australian superannuation funds (18 percent), Hermes (4 percent) and Paceweald (1 percent).
UK water companies are generally favoured by the credit rating agencies because they are highly regulated. That said, Southern Water was not helped by a tough settlement from water regulator Ofwat for 2011-15, during which time the firm’s net debt to regulatory capital value (RCV) is forecast by Fitch to range between 91.5 percent and 92.7 percent – most firms in the sector have RCVs of less than 90 percent.
Further, Southern Water suffered the indignity of ratings agency Moody’s issuing a “potential downgrade” of the firm’s ratings – citing concerns about revenue shortfalls – just two days before the firm’s planned bond issue in mid-April.
Despite this, Southern Water went on to successfully refinance £450 million of subordinated holding company debt following a competitive tender process involving 20 banks that ended with HSBC, Deutsche Bank and UBS as bookrunners within a nine-strong banking and hedging group.
Strong appetite in the bond market resulted in the successful issue of £250 million of bonds with an eight-year term paying a coupon of 8.5 percent. The refinancing also featured a £200 million five-year bank facility priced at 375 basis points over LIBOR, stepping up to 400 basis points from year two subject to certain eventualities.
The strength of the bond market has been much hyped, but less acknowkledged has been the spring-back in the banking market. Citing regulatory pressures such as Basle III, many banks have been seeking to reduce their infrastructure portfolios. And yet, in April, Angel Trains – the UK rolling stock leasing company – took advantage of what one infrastructure advisory professional describes as “excellent pricing” to complete £850 million of loan agreements with a group of nine banks in April.
If all of this appears to be pointing to an entirely benign refinancing environment, it’s a thought that needs to be tempered. As we pointed out in last month’s issue of Infrastructure Investor (p.6), a 2005 investment in the Isle of Man Steam Packet Company ended up being wiped out after just five years, with the asset’s banking group ending up in charge of the asset. This provides a warning of the difficulties that are likely to continue facing highly leveraged “hybrid” infrastructure assets subject to demand risk.
Overall though, the infrastructure refinancing market is producing feelings of optimism. Advisers in the space say they can see a strong pipeline for the next three to six months and, with only gradual rises in interest rates expected by the end of the year, few are expecting a loss of momentum any time soon. The one fear expressed in hushed tones is that Europe’s sovereign crisis may yet trigger another banking crisis.
For limited partner investors in infrastructure, the refinancing market is providing encouraging signs that infrastructure is – as hoped – proving itself resilient as an asset class. “The leverage levels [in refinanced infrastructure assets] now are lower than pre-Crisis, but they don’t need to be a third lower,” one adviser notes.