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Thursday, 20 February 2020

Finding the funding – Virginie Grand

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How to cope with the death of long-term funding and an enthusiasm for project bonds is what dominates conversation with Virginie Grand. By Adrian Murdoch.

To view the digital edition of this report please click here.

The head of project finance for Europe at HSBC is an enthusiastic conversationalist who talks broadly and with insight about the state of the industry globally and what it needs to do as it evolves. At the moment, it is Asia that is driving the project finance business. Although international volume fell back again last year, Virginie Grand points out that, thanks broadly to Asia, it has recovered since the low level during the crisis.

“Look at how it has changed,” she said. “In the 1990s, Europe was dominant, followed by Asia. But if you look at the figures for last year, 50% of the volume came from Asia-Pacific, with Europe making up less than 20%, the Middle East and Africa less than 10% and the remainder from the US and Latin America.”

She said Asian volumes were so large last year thanks to hefty LNG projects in Australia – the cost of Origin Energy’s Australia Pacific LNG project is now A$24.7bn, for example – but the emergence and dominance of Asian economies as exports and providers meant they would maintain the lead. “When looking at ways in which world trade patterns have changed we can see a clear shift,” Grand said. “China and India are projected to have double-digit growth for the next 10 years.”

In Africa, too, there has been a shift, with the development of the mining industry and infrastructure. Traditional project financing had yet to develop, Grand said, adding: “The continent is developing more scope for advisory, but we will see project finance continue to develop in Africa … and of course we need to pay attention to the socio-economic changes brought about by a growing middle class.”

So what does this mean for Europe? It is certainly a challenge for project finance, which has found itself attacked at both ends. At one end, the budget deficits of European countries have meant that public funds have dried up, while at the other, commercial funds have retreated. All of this comes as a background to how on earth Europe is to meet the Europe 20:20 objectives in terms of infrastructure. Around €2trn of infrastructure funding is needed.

Grand is clear about the problem. “There is a massive need for funding, but the new framework for banks has made it difficult to provide long-term funding. This is a durable change,” she said. “It is not going to come back from the commercial banks in a manner that can sustain the level of investment required and can’t be supported just by the German and Japanese banks that are still providing long-term finance. It is not efficient for a bank to lend on a long-term basis any more unless it is confident in its capacity to recycle the balance sheet – for instance, by a bond take-out at project completion. It is no longer their business model,” she said.

Her answer is to open up the infrastructure market to the institutional market. It is clearly a natural fit in terms of the need of funds, as well as the type of risk and stability that cashflow brings. Grand pointed out that it was already happening in the US and Canada, but it was taking a long time in Europe. The difficulties of regulation, the need to gear up to a new challenge and the objectives and criteria vary widely, she said.

There does, however, need to be some kind of clarity sooner rather than later. Although Grand said that smaller PPP projects in Europe can be funded by a mixture of Nordic, Japanese and German banks, there was pressure on larger projects that remain uncertain because of the long gestation periods and questions over funding. She mentioned current projects such as the £1.5bn Thameslink rolling stock public-private partnership deal and the L2 Marseilles ring-road 30-year DBFM PPP.

A clear solution would be project bonds, for which Grand is an enthusiastic proselytiser, and which, she believes, would drive investment. In May last year, the European Parliament and EU member states agreed the launch of a pilot phase for the bonds. It has not, however, been a project without problems. Although enthusiastically welcomed by bankers, it has been a slow process thanks to delays on the public side. As PFI reported at the time, the EIB project bond initiative had just €230m of EU money in its pilot phase. To put that into perspective, that compares with full EIB lending in 2011 of €61bn.

“Public authorities do want access to long-term funding,” said Grand, with a sense of frustration. “The difficulty is that they are reluctant to adapt their procurement process for the flexibility that will allow the project bond to come out.” Nonetheless, she does believe that the time is now ripe. “It will happen. There are pilot projects out there. It will happen this year. It has to,” she said.

Grand rejects charges that HSBC is a hesitant investor, more interested in the advisory business than lending. She said that the bank was fifth in the rankings for last year behind SBI Capital and three Japanese banks.

“In terms of volume, it might have been a lower overall amount, but it was a higher number of deals. That shows the kind of capacity we have,” she said. In export financing, HSBC is in second position in the rankings as a provider of financing. Above all, Grand pointed out that the bank continued to lend all the way through the crisis.

Grand’s loyalty to HSBC is remarkable. In an industry where many of her colleagues have stints at several houses under their belts, she has remained at HSBC throughout her career. She started there in July 1992 in what she calls “the usual way at the time”, in credit analysis. Her work there with French exporters took her on to aircraft finance and export and from there Grand naturally moved into project finance.

“I have been working on export and credit finance since January 1996,” she said. She became head of project finance for France in September 2009 and then head of project finance for Europe in April 2011. “Over the years, HSBC has given me very interesting opportunities – I have in the long run been happy to stay,” she said.

The challenge now, if the retreat of the banks from long-term funding really is as massive and irreversible as she suggested, is to see how the industry will evolve and, more to the point, how banks like HSBC can remain relevant.

“We are implementing a holistic approach to infrastructure – no matter whether for brown or greenfield projects. We can bring developers and investors together. We do not have to look at project finance in isolation to the wider range of services and projects that we can offer. We have a much wider approach than we used to, promoting alignment of teams and products within the bank, and this enables us to increase the added value we bring to our core clients,” she said.

Grand talks about how the PPP model was pioneered in the UK and has now spread its arms around the world. The widened scope of the industry fits with the development of the integrated role of the banks – what is generally called the universal banking model.

She has a plausible answer: “The role of the banks will remain important, but despite their involvement in lending, there is no doubt that it is going to change. If we agree that investors are going to play a larger role in project finance, especially in Europe, then banks can play a major role in the distribution capacity,” Grand said.

“Banks can bring people together; they can provide advisory services to public authorities and the private sector as well; short-term facilities that are useful, like construction financing, equity bridges and VAT loans, bonding facilities, medium-term facilities alongside bond investors, hedging products and export credit loans. Investors will not do everything everywhere. Banks have a strong expertise,” she said.

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