Project finance: it’s not all doom and gloom

The fall in commodity prices made 2015 another challenging year for financing projects but despite the much-publicised negative outlook, deals are still being brought to market, with both greenfield and brownfield developments securing finance for longer term investments.

In the mining industry falling commodity prices have seen many deals suspended, restructured or included in sale processes by both mining majors and juniors. Overall, the industry’s focus has shifted from extreme growth in the ‘resource super cycle’, to an increasing emphasis on securing high quality, core assets, controlling costs and managing capital expenditure. Mining lenders have had mixed results. Those that entered the market early on in the cycle are struggling with difficult assets. More recent entrants however are of the view that if the economics look strong at these prices then the assets involved are worth financing.  There is also a noticeable new flow of DFI (Development Finance Institution) funding into the mining sector, including for so called “pit to port” infrastructure linked to mining projects (such as for roads, rail lines and ports).

With restructuring continuing to play a major role in the mining cycle and enforcement being explored, in a number of African jurisdictions, firms with an already mature mining practice are being kept incredibly busy.

As with mining, many oil and gas projects have either been shelved or postponed Marginal oil and petrochemical products producers are being pushed to the financial brink, as demand for oil and petrochemical feedstock in China declines. The recent lifting of trade sanctions on Iran, with increased levels of crude production forecast, is likely to exacerbate the situation.

Martin McCann, Norton Rose Fulbright
Martin McCann, Norton Rose Fulbright

2016 is likely to see further downward pricing and the exit of certain producers from key markets, while those who remain will be forced to reassess, restructure, or even merge. It’s not all doom and gloom, though. Producers are looking to alternative or new markets like Africa and India where strong demand remains.  Where indigenous resources are in short supply, for example in South Africa, Kenya and Namibia, integrated “LNG to power” projects are expected to play a big part in the deal profile.

In relation to renewables, despite glum forecasts of late, new finance sources from infrastructure funds to bond financing, have supported steady project finance levels. That said, the market is largely dominated by those who regard project finance as the preferred and understood method of funding. Further, financing construction risk continues to prove problematic so larger, complex projects are still reliant on non-recourse project finance debt. Despite the various predictions, sector expertise within project finance banks, increasing competition driving down pricing and a “sharpening of pencils” on covenant packages, mean that lenders still have a strong foothold in the sector.

Emerging jurisdictions are increasingly regarded as bankable by institutions that typically only funded projects in developed markets, with increased liquidity coming from commercial and Chinese banks. The African power sector is a real success story; South Africa leads the way by volume, with over 60 power projects reaching financial close in the last few years alone, while the coal base load and LNG to power programmes ensure the country will maintain its pre-eminence in the coming years.

Typically, the success of a so-called “pathfinder” project in emerging markets tends to boost both developer and lender appetite to fund additional projects. For this reason, the notable 450MW  gas-fired Azura IPP (Independent Power Project) in Nigeria and the 340MW Cenpower IPP in Ghana, herald a wave of greenfield power projects over the next eighteen months. Similarly, the trend towards smaller scale projects – 50MW and under – is increasing in countries with relatively small populations and lower domestic power needs, such as Sierra Leone or Rwanda, which are now seeking to add additional generating capacity that can be absorbed by their power grids.

In the infrastructure sector, the gap between countries with a steady flow of deals and those where the pipeline is patchier, will continue in 2016. The US, Canada and Australia stand out as jurisdictions where deal flow is significant, particularly in relation to transport infrastructure. Examples include the C$5bn Eglinton LRT project in Toronto and A$10bn Sydney Metro project in Australia. Conversely, despite the much-publicised Juncker Plan, Europe, has seen a slowdown in many jurisdictions, with governments cutting infrastructure spending. Although the Plan intended to unlock €315bn of investment, the focus will be on projects with less standard risk profiles for now.

In emerging markets, the trend towards ambitious government-initiated, resource related infrastructure pipelines and projects continues. However, commodity prices, reduced government revenues and of course the usual political and regulatory uncertainties associated with doing deals in emerging jurisdictions all continue to impact access to project financing for these deals. .

Despite the gloomy forecasts, there are still good projects being brought to market and firms with strong and diverse project finance practices are benefitting from this.  Whether it is “pathfinder” projects in the African power sector or restructuring deals in the mining and oil and gas industries, the scene is set for another exciting year ahead in the world of project finance.

Martin McCann, global head of business, Norton Rose Fulbright