The Project Finance guide provides expert legal commentary on key issues for businesses. The guide covers the important developments in the most significant jurisdictions.
Last Updated: November 22, 2018
Project Finance Developments
In recent years, the number of participants in global project finance markets has notably increased, as a wider range of lenders and sponsors, located in several parts of the world, have become active players.
The capacity to fund large-scale projects and historical experience in cross-border transactions have led commercial banks to act as a traditional source of financing. However, the financial crisis and the change in the financial regulatory framework, such as the Basel III standards, have limited commercial banks' availability of credit and placed multi-sourced financing as the main structure to fill the funding gap worldwide.
This means that large-scale projects have now been financed using more sophisticated and complex financial and legal instruments, provided by a diverse set of public and private institutions. In recent years, we have seen the diversity of market participants increase, including capital markets investors, Export Credit Agencies (ECAs), Multilateral Development Finance Institutions and government lending institutions.
Notwithstanding the increased complexity, a combination of local market expertise, good commercial structure (and relationships), due diligence and robust security packages has helped ensure that the new structures are effectively used.
Moreover, global economic growth and the consequent increased demand for energy became a major driver for capital investment. This is especially the case for fast-growing countries. In emerging markets, despite the political uncertainty and tighter fiscal policies, the flows from developed financial markets drove the search for yield and led the bond market in Latin America to reach the highest record of USD140 billion in 2017. See http://globalcapital.euromoneycdn.com/Media/documents/euroweek/pdfs/2018/GlobalCapital%20ROTY%202017.pdf
Required Investments and Results
The need for remarkable projects and innovative deals worldwide over the last year has dominated the headlines. For example, the Asian Development Bank estimated that to develop Asia, investments in infrastructure must add up to approximately USD1.7 trillion per year by 2030 in order to maintain its growth momentum, tackle poverty and respond to the issue of climate change. For the private sector to fill the gap, it would have to increase investments from USD63 billion to as high as USD250 billion per year between 2016 and 2020. See https://www.worldfinance.com/awards/project-finance-deals-of-the-year-2017
The McKinsey Global Institute released, in 2016, a report assessing the worldwide demand for increased infrastructure investment. This report estimated that, although the world today invests around USD2.5 trillion a year on transportation, power, water and telecom systems, this amount is not enough. This report estimates that, from 2016 to 2030, the world must invest USD3.3 trillion a year in economic infrastructure in order to support rates of growth. The report further estimates that emerging economies will demand approximately 60% of that amount. See https://www.mckinsey.com/~/media/McKinsey/Industries/Capital%20Projects%20and%20Infrastructure/Our%20Insights/Bridging%20global%20infrastructure%20gaps/Bridging-Global-Infrastructure-Gaps-Full-report-June-2016.ashx
However, despite a high demand for a greater number of projects, the market continues to be adversely impacted by instability of commodity prices and the political stress arising from global political events.
As a result, according to data from Thomson Reuters, global project finance loans in 2017 added up to USD229.6 billion from 791 deals, down 14.1% year on year and recording the second year of decline. The power sector remained the most active throughout 2017 with USD122.8 billion from 546 deals and accounting for 53.5% of the market activity. See http://dmi.thomsonreuters.com/Content/Files/4Q2017_Global_Project_Finance_Review.pdf
Nonetheless, Americas project finance loans in 2017 reached USD64.3 billion, up 15.7% year on year, posting the second highest fourth quarter volume after 2015. The power sector accounted for 64.7% of the market with 157 deals that closed in the total amount of USD41.7 billion, up 5.1% from a year ago.
EMEA (Europe, the Middle East and Africa) project finance loans totalled USD84.8 billion from 319 deals in 2017, down 44.3% year on year. The power sector posted a decrease of 84.5% in activity compared to 2016 with 219 deals adding up to USD38.2 billion.
Asia Pacific and Japan project finance loans in 2017 amounted to USD80.4 billion from 258 deals, up 35.3% when compared to 2016 figures. South Asia showed a significant increase of 146% year on year to add up to USD21.4 billion from 101 deals.
Nevertheless, as mentioned above, while the global volume of project loans declined last year, bond financing resurged in the international market. The project bond market is being driven forward by the US, which totalled USD13.6 billion in bond volume last year. Green bond issuance has also increased in China and in the first quarter of 2018, the Industrial and Commercial Bank of China – London branch (ICBC London) issued its second green bond for USD1.58 billion. The first bond issued was in the amount of USD2.1 billion in September 2017. See https://www.climatebonds.net/2018/06/icbc-issues-record-climate-bonds-certified-gb-us158bn-triple-tranche-worlds-biggest-bank
The market estimates that the boost of green bond will have reached USD250 billion by the end of 2018, a growth of 60% from 2017. See https://www.climatebonds.net/
This result is also due to global commitments made by governments, companies and supranational organisations, which made green finance a central topic in capital market and fostered the investment agenda towards low carbon projects. See http://globalcapital.euromoneycdn.com/Media/documents/euroweek/pdfs/2018/GlobalCapital%20ROTY%202017.pdf
Although it is difficult to predict how the markets will react, in particular given concerns about political events and the global economy, the demand for infrastructure projects is as high as ever and growth of major project financings will likely continue.
It is clear that structuring a project finance that includes multiple funding sources is becoming more complex every year. It is therefore key that market participants (including lawyers) be fully familiar with market trends and a diverse pool of businesses and risks associated with the projects.
Nonetheless, despite all recent results and developments, project finance has frequently proved to be a resilient way to fund infrastructure projects.