This blog is about a potentially important segment of the senior debt capital market for infrastructure and energy projects in the OECD.
Currently, three of four quadrants along axes of risk/return and tenor are fairly active with respect to a range of project finance senior lenders and transactions:
- Higher-risk projects can be financed on a medium-term basis with ‘Term B Loans’ in the leveraged loan market;
- More traditional project financings (including related construction loans and other liquidity products) can be done as medium-term ‘mini-perm’ syndicated loans by a group of long-standing project finance banks that are continuing in the business even though they are constrained with regard to long-term lending, and;
- Investment-grade projects with fully contracted revenues and other low-risk characteristics can still be financed on a very long-term basis by a few project finance banks that are less constrained in long-term lending, or in the US insurance private placement market.
But one quadrant, high-yield, long-term senior project finance debt, is an ‘open’ quadrant – there are very few active lenders or transactions involved in this kind of financing.
As you’d expect, this blog takes the position that there will be a significant level of activity in the open quadrant, and that it will start developing soon. There are clear fundamental reasons underlying this expectation, including buy-side dynamics for certain types of institutional investor, sell-side factors associated with perceptions of coming refinancing risk and volatility, and – most importantly– a growing pipeline of infrastructure and energy projects that need a lot of debt capital for long-term assets.
The purpose of this blog is monitor, analyze, analogize, speculate about and ultimately record what actually happens in the open quadrant over the next few years. Whatever develops is likely to be pretty enlightening to anyone interested in project and infrastructure finance.
It is entirely possible that high-yield, long-term project finance loans never really take off in any kind of volume – but in light of current fundamental trends, why that will have happened should be a result worth understanding in some depth. Of course we think it more likely that there will be significant volume – and the details about exactly how that result develops from current fundamentals will provide some very valuable insights into the market segment.
This blog won’t last forever. Around 2016 or so (I think), the open quadrant will either be occupied (and so not open) or it will likely remain empty for the foreseeable future (and so no longer interesting) – either way, like any good story, we’re headed to a conclusion.
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