Saturday, 19 January 2019

Not that desperate

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Just how desperate are folks, as President Obama use to call people, to get into deals? Fairly, seems to be the answer but the market can still produce some surprises. I mean, you can get a longer tenor on a Mozambique railway line than on rolling stock in the West Midlands, UK.

Luton Airport was one of those landmark debt deals this year where folks had to take stock. In from Obama’s former home town of Washington DC came private investor Avenir, which took a big piece of the debt refinancing. The yield was attractive enough and the cashflow history is clearly there for all to see. But the concession on the airport runs out in 2031, hence traditional lenders’ wariness about the deal. The risk in the airport, any airport, was shown up soon after when one of the airport’s main operators, Monarch, went down.

On the equity side, HS1 was the jaw-dropping deal this year. Borealis and Ontario Teachers’ Pension Plan (OTPP) bought the asset for £2.1bn in 2010 from the UK government and aside from refinancing and tweaking the debt profile, left it in a long-term investment bucket.

The story goes that there was such a clamour at their doors from other investors such that they, given that they are responsible investors, had to put the deal on the market. Result? A scheme already with £1.9bn of debt went for £3.3bn, with more equity and more debt layered on top.

Borssele, the Dutch offshore wind farm debt financing deal, did not quite generate gasps of horror but that is perhaps a function of where the European offshore wind market is right now. A range of cheap refinancings earlier in year in a banking sector flooded with ECB liquidity led to a tight deals being offered by Shell and its fellow consortium members on Borssele.

Exposure to price risk is one feature of the deal. Interesting, given that only a couple of years ago lenders to the Rijnmond 1 gas-fired plant sold it to Blackstone’s GSO for a song. And Borssele is one of the new breed of low-tariff offshore winds deals where contractors and equipment suppliers will bend over backwards to reduce costs.

But my favourite deal was KKR’s Q Parks financing. Time is money and analysing credit risk does take time. KKR won the Dutch Q-Park business and dangled the opportunity of a new €1.4bn infra loan in front of the banks. Obviously, the banks needed something on which to base their credit decisions about whether to join the deal. So KKR provided a 10-page business plan to do the trick. Old-fashioned bankers who did an Oliver Twist and asked for more detail were duly dispatched to the sidelines. After all, the debt only runs for five years.

A much bigger five-year proposal was Hochtief’s €15bn bank loan to back its proposed purchase of Spanish toll road operator Abertis. Actually, when announced €12bn of the loan was a bridge and up to €3bn was longer-term, ie five years. But it now appears that the deal was finally done as a two-year financing.

The twist here is that the business Hochtief is hoping to acquire will lose four of its eight most profitable concessions before 2021. These four concessions accounted for almost two-thirds of the company’s €796m net annual profits last year. Despite this interesting fact, the deal attracted 17 banks and was 65% oversubscribed.

As a two-year bridge loan the deal certainly makes more sense than a five-year deal that runs beyond 2022. But debt is debt. Making it short-term does not mean the underlying credit risk goes away. The sponsors of the Al Dur water and power plant are still trying to refinance their mini-perm financing from 2009.

It is interesting therefore to compare the West Midlands and Mozambique. One fact, by way of comparison, is that Mozambique does not have Peaky Blinders, the hit BBC TV show, or anything like it. Then again, no one has anything like it. Bordesley was not a place to go for an afternoon stroll in the late 19th century.

The new rolling stock company (ROSCO) Coreline, which won the deal to finance the trains on the new West Midlands franchise, has just put in place a long-term and short-term financing to back the deal. It tailored the solution to get the transaction over the line during the short three-month window it had this summer. In the new year, it will seek to term out the short-term debt.

But some investors from the previous ROSCO deals balked at West Mids due to the fact that it has some diesel units in its portfolio and the trains are metro style units. Putting in short-term alongside long-term financing created a new intercreditor headache. Fine if everyone gets paid out, but not if the refinancing is delayed.

The Nacala 900km rail link in Mozambique is a more traditional old-fashioned deal, albeit in a fairly new location! A 14-year financing backed by JBIC and banked on the export of coal to international markets. What could go wrong…?

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