Project Finance 2019 Second Edition

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 04, 2019

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Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados has one of the largest and most respected projects practices in Brazil, with more than 60 attorneys and trainees, including six partners. The practice has worked on some of the most sophisticated transactions involving infrastructure assets in Brazil, and represents lenders, underwriters, sponsors, contractors and multilateral agencies in complex transactions involving oil and gas, petrochemicals, thermal power plants, renewable energy, water and wastewater, mining, airports, ports, roads and rail, stadiums, and telecommunications.


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 changes in the financial regulatory framework, such as the Basel III standards, have limited the availability of credit and placed multi-sourced financing for commercial banks 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, the diversity of market participants has risen, including capital markets investors, Export Credit Agencies (ECAs), Multilateral Development Finance Institutions and government lending institutions.

Notwithstanding this increased complexity, a combination of local market expertise, good commercial structures (and relationships), due diligence and robust security packages has helped to ensure that the new structures are effectively used.

Moreover, global economic growth and its consequent increased demand for energy have become 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.

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, in order to develop Asia, investments in infrastructure must add up to approximately USD1.7 trillion per year by 2030 in order to maintain growth momentum, tackle poverty and respond to the issue of climate change. To fill the gap, the private sector would have to increase investments from USD63 billion to as high as USD250 billion per year between 2016 and 2020.

In 2016, the McKinsey Global Institute released a report assessing the worldwide demand for increased infrastructure investment. This report estimated that the USD2.5 trillion invested around the world every year on transportation, power, water and telecoms systems is not enough and 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.

However, despite a high demand for a greater number of projects, the market continues to be adversely affected by the 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 2018 amounted to USD282.7 billion from 871 deals, an increase of 21.7% from 2017, the highest volume on record. The power sector remained the most active throughout 2018, with USD137.6 billion from 560 deals and accounting for 48.7% of the market activity.

America's project finance loans in 2018 reached USD96 billion, up 23.9% from 2017, the highest volume on record in the region. The power sector accounted for 49.3% of the market, with 203 deals closing for a total amount of USD47.3 billion.

EMEA (Europe, the Middle East and Africa) project finance loans totalled USD110.1 billion from 340 deals in 2018, up 23.9%. The power sector posted an increase of 34.1% in activity compared to 2017, with 228 deals amounting to USD52.40 billion.

Asia Pacific and Japan project finance loans in 2018 amounted to USD76.5 billion from 212 deals, which was down 2.1% compared to 2017 figures.

Along with the increase in the global volume of project loans, the green bond financing market has also been fostered over the years and increased in the international market. In 2018, the climate-aligned issuance raised to USD167.6 billion, an increase over the USD162.1 billion from 2017, and totalling USD521 billion since 2007.

Conclusion

Although it is difficult to predict how the markets will react, particularly given concerns about political events and the global economy, the demand for infrastructure projects is as high as ever, and the growth of major project financings is likely to continue.

It is clear that structuring a project finance that includes multiple funding sources is becoming more complex every year. It is therefore key for market participants (including lawyers) to be fully familiar with market trends and a diverse pool of businesses and risks associated with the projects.

Despite all recent results and developments, project finance has frequently proved to be a resilient way to fund infrastructure projects. Therefore, it remains one of the main sources of funds worldwide and there is no reason to believe that this will cease to be the case in the near future.

Author



Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados has one of the largest and most respected projects practices in Brazil, with more than 60 attorneys and trainees, including six partners. The practice has worked on some of the most sophisticated transactions involving infrastructure assets in Brazil, and represents lenders, underwriters, sponsors, contractors and multilateral agencies in complex transactions involving oil and gas, petrochemicals, thermal power plants, renewable energy, water and wastewater, mining, airports, ports, roads and rail, stadiums, and telecommunications.