The Value of Public-Private Partnerships

Transcription

1 The Value of Public-Private Partnerships Learning From Experience How is the debt crisis in the Euro zone affecting investment decisions in the P3 market Bankia Javier García Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law firm.

2 EU financial crisis (1/2) EU economies are facing a downturn characterized by highly indebted public and private sectors and lowering credit quality. The consequence is a shortage of liquidity and increased cost of funding. In addition, the financial markets are affected by the lack of interbank lending and, specially, an increase in regulation. Regulatory requirements: EBA (stress tests), Basel III and domestic regulatory institutions: Banks become selective with their investment decisions. Project Finance is amongst the most exposed sectors to this crisis for being high consuming capital intensive assets with long term payback. 2

3 EU financial crisis (2/2) Liquidity: ECB s LTRO made EUR1 trillion of low cost money available to be repaid in three years. Applied to meet liabilities with short term maturities No pass through. No immediate effects in infrastructure Leverage: IMF has projected that EU banks will undergo a deleveraging of USD 2.6 trillion over the next 2 years, mainly in the non-domestic markets. EU banks are actively selling assets in the secondary market 3

4 The good days.where we come from EU banks have been the main source of project finance loans Strong competition: aggressive structures and pricing Usually transactions were underwritten and syndicated. H Crisis Source: Own elaboration based in data from Thomson Reuters (PFIE). Considers only EU banks in top 25 ranking 4

5 Where are we now.. Structures became more conservative: Maximum tenors of 10 years, cash-sweeps, increase of DCSRs, lower leverage. No underwriting EU banks have seen their market share reduced despite overall increase in volume (USD 181 billion in 2006 to USD 213 billion in 2011) Source: Own elaboration based in data from Thomson Reuters (PFIE). Considers only EU banks in top 25 ranking 5

6 And for the future? This retrenchment from EU banks represents a structural change more than a temporarily response to markets Other non EU banks will partially fill this gap (short term lending and more conservative). Not enough banks for big transactions However, EU banks will continue to play an important role in project financing Bridge to bond solution rather than buy and hold (bids, construction period, etc.) Club deals for smaller size deals with appropriate structures Capital markets as alternative source of financing 6

7 US specific case Conclusions have to be based in the limited deal flow to date Historically the market has been strongly dominated by EU project finance banks. There is a gradual retrenchment of some EU banks from the US. EU sponsors in the US have access now to non EU banks and capital markets. Recent transactions: PR22-PR5 (Puerto Rico), 09/11, closed with bank club deal. And 04/2012 Midtown Tunnel (Georgia) closed with a bond solution. US transactions are generally too big for bank club deals. Usually dependent of TIFIA or public grants. There are still liquidity in the market from EU banks able and willing to invest in assets offering a reasonable risk/return balance. 7

8 Conclusion PPP infrastructure financing is undergoing a transformation and reshaping where new players are coming to the market which together with the current actors have the liquidity to make deals happen. However the number of transactions coming to market in the US is surprisingly low given the necessities. Government, authorities and grantors should use infrastructure as a countercyclical policy to reduce unemployment and increase wealth. How can the public sector invest in infrastructure given the current budgetary constraints? The answer to this crossword: PPP financing! 8

9 Thank you! Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law firm.