Stability in the face of complexity

How are corporate trust services professionals adapting to changing market conditions? Will Marder of Deutsche Bank explains.

II: As a corporate trust services provider, what changes have you seen in the project finance market in a post-financial crisis world?

WM: Project structures, in general, have trended towards being more complex due to an increased need to reach a wider variety of lenders and investors in order to attain the desired levels of funding. In order to meet the capital requirements of large transactions, borrowers have to attract debt from multiple sources, such as banks, institutional investors and export credit agencies. There may also be senior and junior tranches of debt, bonds, and letter of credit facilities. Tenors, which appeared to be stretching out, have pulled back again. Lead arrangers may not want to, or intend to, maintain their positions over the long term. As such, having a dedicated third-party agent can add stability to a project finance transaction.

II: How have you positioned your services to respond to a change in the sources of capital being used to fund project finance transactions?

WM: We have been emphasising the benefits of a third-party administrative agent on highly structured transactions, such as hybrid bank loan and bond deals, or deals with multiple tranches of debt. We have worked closely with a number of export credit agencies and multi-nationals to learn how they operate and how we can provide the best service to them and to our clients.

II: You’ve had a strong couple of years– what’s been driving demand for your services?

WM: A combination of factors has been driving demand for us: the aforementioned rise in complexity, coupled with a growing concern for high-quality deal management. Lenders want to know that covenants are being tracked and that projects are operating in accordance with their original assumptions. Lenders also want to feel confident that collateral is being adequately protected and that reserve accounts are fully funded. Serving as an agent is typically not a core business for many project finance lenders – they simply do it as part of their portfolio management activities. However, that is exactly our business and it is something that we do very well and take pride in.

II: What are the challenges involved in operating across many different sectors and geographies?

WM: It’s more than just having people on the ground in major financial centres, it’s having the right people on the ground. Deutsche Bank separates itself from the competition in that we have hired project finance bankers to manage our administrative agent service, so we truly understand what lenders are looking for in terms of transaction management. In terms of our geographical presence, we are a global financial institution, with a strong presence in key financial hubs. Our local teams understand the nuances of their region and translate that into the best client service available.

II: You’ve been involved in many renewable energy transactions. Is that an area you’ve put a lot of effort into developing, and what particular demands are there in the renewable energy space?

WM: Renewable energy represents a strong sector of the project finance marketplace – one that has continued to grow despite global economic challenges. More than that, Deutsche Bank is committed to “Banking on Green” and is a big supporter of renewable energy in our own business. The bank has pledged to be carbon neutral by the end of 2013, and we are well on our way towards achieving that target. In terms of the demands related to working on renewable energy projects, we recognise that this is a specialised field, with its own set of pitfalls to be aware of. Our project finance team has a long track record working on wind, solar, hydro and other types of renewable energy deals. Our staff regularly attend conferences and seminars on the renewable space so they can be fully versed on the industry.

II: What are the key things to keep on top of in a typical project? What could go wrong in a worst-case scenario?

WM: Deutsche Bank’s project finance team operates in accordance with a set of “industry best practices” that is consistently updated based upon our in-depth experience. The keys to effective asset management post-closing are maintaining an active and open dialogue with the borrower and the timely distribution and review of project information, such as financial and operating statements. Our project finance team forges strong relationships with our clients, and we are in frequent communication regarding project performance during construction and post-close of deal. This flow of information ensures that there are no surprises – if a project is experiencing problems, we can work closely with the borrower, its lenders, independent engineers and legal counsel to understand the issues and mitigate potential downside risks. In a worst-case scenario, such as a default or bankruptcy, we are an active participant, working closely with all parties to maximize the return of capital. Many things can and will go wrong from time to time, but having an experienced team that won’t get flustered is key.

II: Do you think there are misconceptions of the trust and agency roles? If so, what are they?

WM: The typical roles – administrative agent, bond trustee, collateral agent and account bank – are often thought of as not being that important, and as such, selecting an agent is often left to the last minute before a deal closes. In reality, quite the opposite is true. A good agent can serve as the glue that holds a deal together and can prove to be an active and important member of the deal team. We like to think of our agency services not as commodities, but as partnerships. We work very closely with our clients early in the process to make sure we understand the deal and to add as much value as possible.

II: Could you identify one market theme you’ll be keeping a close eye on in the next year, and explain why?

WM: Deutsche Bank is always following trends in the project finance industry to see how we can best adapt our products and services to suit the needs of our clients. Along these lines, we seek to understand the latest transaction structures and why they’re being used. We do “deep dives” on government programs like the US Department of Energy’s Financial Institution Partnership Program. A key market theme for us in 2012 is bank loan and capital markets liquidity. If liquidity is tight, we can expect to see new and innovative structures, and we’ll look for opportunities to add value by serving in key facilitative roles.

Will Marder is global product manager for project finance in the New York office of Deutsche Bank