Project finance makes triumphant return after two years in doldrums
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A&O sweeps the board in UK and worldwide rankings with $70bn worth of deals. By James Swift
The 2010 calendar year was a big one for project finance, with global activity rebounding after two years of decline. Infrastructure Journal’s global infrastructure league tables show the combined value of project financings across the world in 2010 stood at $243bn (£148.97bn). While this is still 22 per cent lower than the $312bn seen at the height of the market in 2007, it represents a 38 per cent rise on the 2009’s total of $176bn.
As project finance deals are lawyer intensive, a strong year is generally good news for law firms, and 2010 was no exception.
Allen & Overy (A&O) had a particularly good year. The firm came top of both the UK and global rankings, advising on 16.6 per cent of UK deals by value and 10.7 per cent of worldwide deals. In 2009 the firm came top of the global rankings, but came second to Slaughter and May in the UK. In total, in 2010 A&O worked on projects amounting to just shy of $70bn.
“After the debt crisis the markets took a deep breath,” says Anne Baldock, head of PPP at A&O. “But the transactions that had been postponed have started again, so we saw a double whammy in terms of deals in 2010.”
Thawing frozen projects has led to fears that 2010’s promising figures could be a mirage and that in reality there is still a lack of new projects. But there are further signs of recovery.
“We’re also seeing the development agencies coming back again, so that’s helping to boost projects work in the emerging markets, which has been great,” says Baldock. “The O3b broadband deal [a $1.2bn project, with backers including Google, that aims to bring internet access to some of Africa’s poorest regions] was a good example. We advised six development finance institutions and the commercial lenders on that.”
Markets in Africa and the Middle East came back with a vengeance in 2010. Two of the biggest deals of the year were Saudi Aramco’s and Total’s $14bn financing of the Jubail Refinery in Saudi Arabia, and phase one of ExxonMobil’s $18bn liquefied natural gas project in Papua New Guinea. On the former, A&O partners Bimal Desai and Nigel Pritchard acted for Saudi Aramco Total Refining and Petrochemical Company, while Linklaters partner Manzer Ijaz advised the financial backers, which included seven export credit agencies and 31 commercial banks. Latham & Watkins partner Simon Dickens acted for the financial backers.
The Asia-Pacific region also had a good year in 2010. Two Australian firms, Allens Arthur Robinson (AAR) and Blake Dawson, feature in the global top 10, while Freehills just makes the top 20. AAR alone worked on 23 deals worth a total of almost $31bn. While Australian firms tend to be focused domestically (Asian clients usually like to see big US or UK firms signing off their project financing deals), their appearance on the lists has not come as much of a surprise.
“[Seeing two Australian firms in the top 10] doesn’t surprise me at all given what’s happening in the Australian mining sector,” says Herbert Smith global head of infrastructure Patrick Mitchell. “Commodity prices are soaring, which has led to project financings being sucked in to develop new resources.”
Clifford Chance’s international presence was a massive boost for its projects practice. The firm made sixth in the UK rankings with three deals totalling just under $2bn, but was second globally, scoring 57 transactions worth more than $48bn.
Norton Rose had a strong year too, reaping the benefits of its international strategy. By volume of deals globally the firm ranked third. Global projects head Jeffrey Barratt says: “2010 was a welcome return to more normal levels in project financing. One benefit for a number of firms came from the magic circle pulling back from the sector slightly.”
Although margins are coming down significantly, tougher market conditions have made lending difficult for banks and deals more arduous for firms. The moment when RBS, one of the most active and aggressive banks, retrenched and sold its projects book to Bank of Tokyo-Mitsubishi UFJ in November 2010 was a particularly sobering one. It removed a chunk of the market and affected the terms on which other banks will now lend.
“It’s the same fees but a lot more work,” says Barratt. “We often see four banks in a club deal and each bank has its own touch point, and we must negotiate each of these.”
The lack of a clear pipeline of major deals in the UK has also set alarm bells ringing for firms.
“In terms of the UK, the biggest challenge will be getting the go-ahead for greenfield transactions,” says one investment banker. “Since the disappearance of the monolines [specialist insurers], it’s been difficult to raise a significant amount of debt. Banks are showing more interest now, but with Basel III it’s going to get a lot tougher for banks to lend long term.”
“Project finance is very much a global market,” says McGrigors head of banking and projects Michael Watson. “Capital and contractors are very mobile, so the UK needs to be competitive internationally. There needs to be stability in the legal and political regulatory environments so investors feel safe investing for the long term. The less visible the pipeline of projects, the less people will want to invest.”
But even if there is a blockage in the pipeline of deals, and the future of PPPs look uncertain under the coalition Government, few expect it to last long.
“I’m sure the Government will come up with a new structure to address our infrastructure and energy needs,” says Barratt, “but it’s unlikely to be too dissimilar to PPPs. The offshore wind and nuclear projects alone involve huge capital costs and will have to be financed somehow, and you can’t do it entirely out of the public purse. Someone’s to come up with a new way of bringing in private sector finance.”