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Session 5a- Long term financing- Bill Streeter

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					“The Search for Long-Term Financing for PPPs”


Public-Private Partnership Days 2010




William Streeter
Managing Director Global Infrastructure Group – Asia Pacific


March 22, 2010                                     Manila, Philippines
Missing Links to Long-Term Infrastructure Finance
> There is considerable cash available in Asia after years of
  economic growth, therefore,
> the supply of money for infrastructure is not a problem, but its
  efficient allocation remains a central problem
> Infrastructure projects, as long-term assets in search of long-term
  financing, and pension funds, with long-term liabilities in search of
  long-term assets, appear to present a perfect fit for each other
> And yet, this match remains elusive
> What are the limitations from the infrastructure finance side?
> What are the limitations from the institutional investor side?
> How best to reconfigure the supply-demand dynamics?

www.fitchratings.com                                        March 29, 2011   1
Limitations of Infrastructure Finance in Asia:
India‟s Lessons from the Front Line
1. Many projects show strong economic value (capacity to repay debt), but
2. Most carry heavy debt load, which constrains the ratings profile. Not all of
   the debt for construction – some negative grants to government
3. Project cash flows highly susceptible to construction delays, economic cycles
   and interest rate risk (frequent interest reset periods). This multiplicity of risks
   increases probability of default
4. Amortisation periods still aggressive relative to cash flows
5. Fitch expects a fair amount of loan restructuring to take place over the next
   few years, as a wave of projects exit construction and enter operations
6. Assigned project bank loan ratings consider ability to restructure debt within
   remaining concession tail (economic capacity to repay debt)



www.fitchratings.com                                                      March 29, 2011   2
Relationship Lending and Sustainability of Finance




www.fitchratings.com                        March 29, 2011   3
Limitations from the Institutional Investor Side
Orientation toward equity investments with an exit strategy is well developed
>      Safer to invest in corporations that invest in infrastructure projects than in individual
       projects, and these corporations go through development cycles, so equity is game
Orientation toward long-term fixed income investments is underdeveloped
1. Complaints about lack of long-term investments, yet fear to take long-term stand on
   anything
2. Concerns about sustainability and strength of project cash flows (newness of
   infrastructure as an asset class, and lack of project operating history)
3. Concerns about continuity of supply of related project debt (fixed income likes a
   steady supply of product, not a one-off investment opportunity, and many countries
   have difficulty sustaining a pipeline of projects)
4. Absence of a secondary market (buy and hold only is an impediment to portfolio
   growth)



www.fitchratings.com                                                             March 29, 2011    4
In Search of a Bridge to Institutional Investors

>      How to reconcile near term
       project cash flow difficulties
       with their long-term economic
       value?
>      How to compensate for
       limitations in government
       finance options (governments
       cannot guarantee
       everything)?
>      How to act as a catalyst for
       the development of local
       financial markets?




www.fitchratings.com                           March 29, 2011   5
Considerations of Credit Enhancement For Project Debt

Tests for Credit Enhancement:
1.    An issuer’s debt remains its sole responsibility, but its operations are supported by another party
      with a stronger credit profile than the issuer.
2.    Can be provided by statutory authority or through a contractual arrangement
3.    It is usually reactive, but can be structured to be proactive
Forms of Rated Credit Enhancement:
>     Supplemental income or Subsidies
>     deficiency make-up clause (usually debt service reserve fund)
>     subordinated debt or line of credit
Benefits of Credit Enhancement:
>     Credit enhancement stabilizes project cash flows which broadens the investment opportunities
      for domestic markets
>     Recognizes that both payment and recovery is in long-term cash flows, so it shifts orientation to
      preventing default from assisting recovery
>     Stabilized project cash flows allow for progressively longer debt tenures (corrects long -standing
      mismatch between term of debt and useful life of infrastructure assets)
>     Since credit enhancement is a loan and not a gift, it allows for capital to be recycled, so
      infrastructure finance becomes sustainable and regenerative

www.fitchratings.com                                                                      March 29, 2011    6
Credit Enhancement Through Supplemental Income – Airport Motorway
Trust, Australia




www.fitchratings.com                                   March 29, 2011   7
Credit Enhancement Through Supplementary Income
>      One example of Credit Enhancement through supplemental income is the Airport
       Motorway Trust project in Australia.
>      The government issues an Infrastructure Bond at its cost of funds and lends the
       proceeds to the project company, which invests the proceeds at the market rate.
>      The difference between the cost of interest on the Infrastructure Bond and the
       interest income on the invested proceeds provides supplemental income to the
       project.
>      In the early years of operation, when Airport Motorway’s toll revenues barely
       provided over 1X debt service coverage, total coverage with supplemental interest
       income was 2X.
>      This allowed project debt to have a much higher rating and lower cost of capital
       than if it were secured only by toll revenue
>      The Infrastructure Bond carries a long-term maturity date, which gives the project
       cash flows ample time to ramp-up. The bond is retired from the invested proceeds.
>      Thereafter, debt service is payable solely by project revenues.


www.fitchratings.com                                                         March 29, 2011   8
Credit Enhancement Through Partner Alignment
Alameda Corridor Transportation Authority, USA („A‟ Senior Lien Revenue
   Bonds; „BBB+‟ Subordinate Lien Revenue Bonds)


>      This innovative rail connector project was financed, built and operated by a public sector joint
       powers authority
>      The project provides a rail connection between the Ports of Long Beach and Los Angeles and
       the central rail yards of Los Angeles
>      Debt is secured by container charges payable by the private railroads that use the connector.
>      If there is any shortfall in the amount available for debt service, the Port Authorities of Long
       Beach and Los Angeles have agreed to provide shortfall advances.
>      Senior debt is also credit enhanced by a layer of subordinated debt
>      Total indebtedness for the project was reduced by USDOT construction grant, making the debt
       more sustainable from container charges.
>      These layers of credit enhancement allowed for a higher rating and a lower cost of capital for
       both the senior and subordinate debt.


www.fitchratings.com                                                                       March 29, 2011   9
      Credit Enhancement Through Subordination (TIFIA Program)
>   The USDOT’s Transportation Infrastructure Finance & Innovation Act (TIFIA) program provides credit
    enhancement in support of senior project debt
>   The program provides subordinate debt, guarantees or lines of credit to eligible surface transportation
    projects, although subordinate debt is more prevalent
>   Eligibility criteria is that the use of subordinated debt lifts the credit quality of the senior project debt to
    investment grade.
>   As of July 2009, US$6.5 billion in subordinated loans have credit enhanced senior debt of US$24.4 billion in
    projects




     www.fitchratings.com                                                                                 March 29, 2011   10
Credit Enhancement Through Pooled Project Risk
The Credit Implications of Pooled Project Risk:
1. lower default risk,
2. longer tenure for loans,
3. lower interest costs, and
4. increases market liquidity
5. Does not require a government guarantee
In the US, there are:
 21 rated State Revolving Funds (SRFs) – Water & Sewer Infrastructure
 9 rated State Bond Banks/Finance Authorities – General Infrastructure
 9 Dedicated Pooled Programs – Economic Development, Airports,
  Transportation Projects

www.fitchratings.com                                         March 29, 2011   11
Credit Enhancement Through Pooled Project Risk
Fideicomiso de Inversora Bursatil in Mexico:
>      The financing consists of the bundling of debt from 4 separate toll road projects into
       one financing trust
>      All four projects are organized under separate SPVs, and have established
       operating track records. One has seen declining traffic and revenue in recent years.
       The others continue to see growth in both traffic and revenue.
>      In this transaction, the bundled assets have geographical diversity, although in
       other transactions, the bundled assets are specific to one state.
>      Project cash flows first pay operating and maintenance costs.
>      Residual cash flows from each project are then swept into a master trust where they
       pay debt service.
>      Project revenues cross-collateralize each other, and capex and debt reserve funds
       are fully funded
>      These credit enhancements resulted in a higher debt rating and lower cost of capital

www.fitchratings.com                                                           March 29, 2011   12
In Summary
>      Much of the region is again awash in cash
>      Infrastructure assets have a long useful revenue life, but also propensity to experience
       intermittent cash flow difficulties
>      Credit enhancement of senior project debt is a more efficient allocation of capital than a
       government guarantees, since it promotes development of domestic debt markets
>      Coincidentally, it promotes development of local feasibility consultancy skills
>      And it creates a healthy tension between the subordinated debt and equity, which produces
       quicker and more proactive initiatives from project operators to rectify shortcomings
>      By stabilizing project cash flows, credit enhancement broadens investment opportunities,
>      permitting the exploration of progressively longer debt tenures (correcting that long-standing
       mismatch between project life and the term of its debt)
>      Credit enhancement is a loan and not a gift, thus it allows for capital to be recycled, so that
       infrastructure finance becomes sustainable and regenerative
>      The long concession time frame should usually provide ample opportunity to recover both senior
       and subordinate debt



www.fitchratings.com                                                                       March 29, 2011   13
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