Rod Morrison: Welcome everybody to the European Infrastructure Roundtable, which is sponsored by Lloyds Banking Group. The first question I would like to ask concerns the appetite for, and the trends in, bank debt in the infrastructure market at the moment. So if you would like to start, Gershon.
Gershon Cohen: I think an unparalleled economic landscape is certainly not an easy environment for people like us, whether we are looking at the lending or investing side. To make progress, all of us in this kind of business need a degree of certainty, and it is that which is most absent at the moment. But key to playing a successful role in financing infrastructure, in whatever model that is going to be, I believe will be deep, key sponsor and developer relationships, and working out where capital and resource should be deployed for maximum return.
So, I think we’re asking about how the banks are going to react to all this; how the money is going to react. It’s going to be very much more focused. I think there are a number of factors, clearly, that are limiting the availability of funds. Liquidity difficulties for banks are leading to club deals with higher margins and fees than the sector has been used to. Around that are obviously very difficult syndication conditions and a disappearing, a paucity perhaps should we say, of the bond market.
A further negative impact could be the weakened credit strength of the construction sector, which is pretty key to the development of projects. So, in general, I think, given the importance of infrastructure and the development of infrastructure for the wider global economy, funding may prove difficult.
From the government’s perspective, which is relevant because a lot of what we do is clearly generated by the government - even while credit margins of debt have more than trebled from historical lows of 2005/2006 - the benefits of using private sector capital I think is proven.
Market discipline in terms of competitive pricing, transfer of project risk, development risk, the risk of construction delays, maintenance costs and the management of whole life costs and so on - all of those things are still important in the government’s evaluation of going down a route involving private sector capital.
I think well structured projects will get funded, they certainly have been in the first six months of the year in the UK: we have seen a large number of projects funded, albeit, as I said, on the basis of clubs. There has also been evidence of a few institutions looking to take underwrite positions - maybe not evidence of an immediate syndication market, but there is a lot happening in what we call the secondary banking sector in terms of debt being sold down - maybe not straight away but certainly over a period of time post-financial close.
In 2008/2009, we did see higher costs and reduced availability of private debt, and particularly lenders’ growing aversion to longer-term maturities in what is a volatile and uncertain market. Some calm has returned. Whether that’s interim or long-term I’m not going to make a judgment on, but there has been some calm.
Governments have helped by intervening to ensure that liquidity has been available for the funding of projects. We have seen that in Europe and, indeed, the UK. So that has preserved the model of public-private partnerships and concessions.
It is probably worth just a quick note to mention that while the credit margins that I have described have increased from where they were, the underlying inter-bank lending rates have experienced some decrease, so that has ensured that from a public sector perspective the net all-in cost has probably remained largely unchanged. But that might be as a result of banks not properly factoring in the inter-bank rate into their models; these things take a little bit of time to work through the system.
The final point I will just make is slightly general, but it is related, because all of us, really, need some kind of certainty around the pipeline if they are going to continue to be involved in it. I think there is pressure on national budgets across the globe. We are seeing cancellation of projects and deferring of projects. But I would say that those are more in the non-essential arena.
Where projects do provide an economic benefit we are going to see those projects continue. So there will be a pipeline. But I think we’re trying to work through what that pipeline is going to be, and I’m sure that is something that we can, therefore, respond to. I am optimistic about that, but I think that is going to work through.
I also don’t give up on the idea of social infrastructure being critical as well, because a successful economy also needs social cohesion. You need the balance between those projects that will have a direct economic benefit and those that preserve some social harmony as well. I think in the UK what you are seeing is a government looking at trying to deal with those very challenging questions.
Rod Morrison: Do you see any move back in the trend of improving credit terms and liquidity given the euro crisis over the last couple of months?
Gershon Cohen: I think a competitive market drives a lot of the main fundamentals in terms of pricing. I think credit around the space is something that is more judged by the experience that you have had, and the combination of the two then results in the sort of terms that are then on offer. We don’t really have, at the moment, the competitive tension that is driving pricing, although there are signs of that - indeed in the OFTOs, where we’ve seen an interesting model emerge there.
There is some debate over whether it is the correct model, but it is certainly an interesting model, and that has brought about an element of competition, both on the debt side and on the equity side. We’ve seen competition driving a price there. So competition proves that it can deal with an element of pricing.
On the credit side, though, I think that as more people have understood the sector - and indeed, as more people have made a differentiation between hybrid economic infrastructure that is more about demand, traffic volumes like ports and airports and so on - the distinction is being made that it is not a holistic infrastructure, one size fits all. It is compartmentalised, and in sectors where you do have a serious degree of operating risk, I think covenants, if anything, are getting tougher rather than weaker.
When you move to the other end of the spectrum where you have less operating risk and it is much more about a government payment dependent on the availability of the facility, as that becomes more and more proven, then perhaps credit terms will begin to go the other way as people get more comfortable.
A final point just around credit terms; I’ve always believed that the long-term owner of the debt in these kinds of projects that we are talking about is the capital markets and the bond markets Therefore, it becomes much more about ratings and ratings quality. I think that the kind of ratings people are talking about for the successful bond take-out are likely to be around an A grade, and so that will automatically dictate the cover ratios and the security packages and so on.
Rod Morrison: Chris.
Chris Elliot: Debt pricing, I share some of Gershon’s comments: there is not enough competitive tension in the debt market at all at the moment. I think I would be slightly more bullish on the fact that bonds are coming back a bit stronger. I’m not sure I necessarily agree that the bond market is the natural home of financing these in the long term. I think there is a degree of implicit inflexibility in bond markets for long-term financing, and I think one of the challenges for all types of infrastructure is to try and build
flexibility into how it operates itself.
I think the other thing that is important, and I think the challenge for our industry, is it’s not just private capital that I think is needed to do this infrastructure, it is private management. I think what we’ve seen in a lot of the PPP models that have been developed is too much of an extreme focus on just the finance, too much of an extreme focus on the returns being driven just by the finance.
I think for the sustainability of the business you’ve got to see much more active management coming from the private sector associated with that finance to deliver better service. The way the market is going, I think in the UK there will be a sustainable social infrastructure and economic infrastructure.
Looking from an equity perspective, a lot of economic infrastructure really is just the GDP tracker. It is difficult to control the risks that you are given, and therefore I do wonder on a project finance basis whether there is long-term sustainable business there. And I think we ought to try and move away from single-purpose project financing of infrastructure to a much more corporate financing of infrastructure.
I think you will get much more flexibility in management. I think you will get much more flexibility in the finance and you will get some from the bonds, some from the banks, and you will be able to procure a school like you procure a scanner: you will go to a company and they will be able to give you a school. They will be able to give you a hospital, they will be able to give you a road that will make the whole procurement period much shorter and should make that procurement period cheaper as well for both the government side and the private sector side.
Rod Morrison: Is there a trade-off between certainty of revenue and therefore cheaper bank finance, more private sector management of an asset on a corporate basis.
Chris Elliot: There is obviously trade-off between all of those risks, but I think the important thing, though, is to look at it across the life of the asset rather than a snapshot of financial close. I think certainly in the UK we have been preoccupied with the time of financial close, not taking into account anything that is going to be a variation going forward. I think it is quite absurd to believe that any of these facilities are going to remain static for 30 years and to analyse them under that basis.
Rod Morrison: Mike.
Mike Gerrard: I guess I have a couple of themes. One would be look back at how both the public and the private sector dealt with the whole credit crunch. I think of two initiatives in the public sector that were proactive and responsive to the problems and worked well with the private sector.
The first was the fact that the member governments of the European Union voted an increase of lending capacity to the EIB, and as a result of that the EIB was able to respond and up its game. I think as you go around all the countries in Europe, you will find that this is a beacon of stability in a violent storm, and not just in the infrastructure sector but actually a whole series of sectors of the economy.
The EIB is now the largest multilateral lending agency in the world, by quite a substantial margin, which is not widely known. They really are very effective and I think they have responded and they were still there offering the same product.
The other initiative was the UK Treasury’s own intervention in setting up the TIFU, the Treasury Infrastructure Finance Unit. I hope others would agree, although this is a discussion, but that was a welcome and positive initiative by the Treasury, brought in as a lender of last resort capability. It was a statement of confidence, which meant for bidders actually, at the end of the day, that there is no doubt that your project will get financed.
It’s one of these sorts of paradoxical interventions of government that a measure of success is actually how little it is used, not how much it is used, and that, unfortunately, is a bit of a frustration for Andy Rose and his team. But actually they have been extremely successful in the mission that they were given, albeit they have only actually made one direct loan, which is to the Greater Manchester Waste Project.
That is one theme for me. The other theme comes back to how you react with change in circumstances, and we get a lot of visits from, obviously, the market and banks in particular saying: all you guys have to do is change the risk profile in SoPC 4 and all will be well.
SoPC 4 is fundamentally like a BBB credit-rated contract, if you have a government covenant at the other end, and we think that is the right positioning of SoPC 4. That is effectively where the value for money balance comes out, and we’ve always looked to the market to work with that - whether it is through debt equity ratios, the role of different tiers of capital, the role of monoline insurance.
The challenge for the market has always been that value for money looks like BBB under an SoPC 4 framework. Now, you, the market, can you please provide creative solutions to make sure that that is actually deliverable and actually does achieve the value for money we want.
Now, even though we’ve been through these sorts of stormy times, my assessment is that that analysis is still valid. Nobody has proven to our satisfaction that there needs to be a recalibration of the risk arrangements between the public and private sector, but that happens to be my own assessment of where we are at the moment.
Rod Morrison: If you want to bring more, say, bond finance into the market, though, does the contract need to be slightly above BBB?
Mike Gerrard: Again, that would be a disturbance to the value for money. If there is some sort of market failure, which is where you would go if you carry on with that line of reasoning, let’s hear about it. But Treasury and the public sector is not good on declaring market failure. To get an intervention is a very, very rare step, and TIFU was a very rare step and we think it has been successful.
We see initiatives, and Marc and Hadrian’s Wall is a very good example of an initiative that has come forward in the market to respond to these circumstances. Plan A is for the market to deal with it, that is absolutely where we want to be. So, things would have to change further in some fundamental way before we didn’t think that was the right way to go.
Chris Elliot: Does TIFU have a fixed life, or is it there forever?
Mike Gerrard: I’m trying to think back to what the public announcement was at the time. They probably said something like - “for as long as is necessary”.
David Lee: If you had asked the same question about PUK, probably even three years ago, you would have said it was indefinite and that’s actually proved to be the case.
Graham Beazley-Long: Picking up on Chris’s point, SoPC 4 is proven as a single SPV for projects. Even though it allows for corporate finance, it is not really allowed for corporate finance because of the way you price individual deals.
Mike Gerrard: You are right, first of all, to say the presumptive model was in the minds of people back in SoPC 1, David can probably say this far better than I can, was of a more classical project finance SPV structure. There has never been a policy position that says: and by the way, this is how it has to be.
Corporate finance has been available and has been used all throughout. In fact, it is interesting, Chris’s point, it is being more used now, specifically in the waste sector. It’s never been a preference expressed. We’ve just been, you know, diverting the resource to create the contract that was most likely to be used.
David Lee: If I can just respond on the SoPC 1, although it was called SoPC when it was first released. Clearly, we weren’t looking forward to it ever being improved upon. I hesitate to use the expression “fossilised”, but the model has become very much, I guess, crystallised around certain assumptions - but that was never the idea when it started.
We were always looking forward to a world similar to the one that Chris has described, largely as a result of people like Chris saying that’s the way the world logically should be heading. So, I think if you were to ask the people sitting in a room who were working on SoPC what the world would look like now, actually I don’t think anybody would have predicted that we would still be in a world where we have 900 single SPVs delivering 900 individual sets of services. You know, some kind of consolidation was entirely logical, and to me still is entirely logical.
Mike Gerrard: I think I would absolutely agree. But let’s talk about one of the barriers: why hasn’t it happened, because I’m not aware of anything, in a sense, that has been preventing it from the government side. We would welcome, I think, companies that were more classically built up in long-term businesses and infrastructure service delivery migrating to a corporate finance platform by some sort of aggregation. I would welcome it. Why is it not happening?
James Butter: But why change SoPC, because actually that’s quite bedded in; there are a lot of people who have been well trained up now and are used to dealing with that particular model. It has its use because there is a tipping point at which customer choice suffers. Once we go to the corporate model, which I agree is probably the best future for broader service delivery, you start to take away choice from the end-client, the end-user. That’s the danger, whereas in bespoke cases using SoPC is actually quite strong.
You can say: this is for this one particular project, we know how it works, this is how we go and put it into place and we can do it within x number of months.
I think when we start to look at developing something else, we would be better to start almost from SoPC and broaden it out; look at the corporate financing we’re trying to gain to undertake the activities, rather than just simply rewriting SoPC and changing things that work, frankly, reasonably well, on the basis that all of us are probably quite aware of the fact that any document we put in place that replaces it is going to be broadly based upon the goodwill that exists between the two parties entering into the contract.
Gershon Cohen: I wonder if that is the issue, that there is discomfort culturally about having flexibility between the private and public sectors. I think it is better in Europe. I think you get that closer model around the concessions they use in Europe, the 90-page decision documents, where actually when things get a little bit difficult, it is not just driven by what is in the contract, but a much more wider discussion, the rebasing that they have and things like that.
Maybe it is a cultural thing. It hasn’t happened because the corporate model actually requires more of a partnership to emerge, where there is a little bit more give and take rather than a rigid framework through which people know where they are on day one.
David Lee: It sounds like we’re talking about the football World Cup, actually. That’s what you are talking about,
the difference between 4-4-2 and the average approach of football when compared with the flair of the Continentals and Africans.
Perhaps there is some truth in that, because when we put together our world PPP guide, one of the most interesting features of it was that other countries when looking at PPP, while they kept many of the central tenets - speaking from a legal regulatory perspective
rather than the question we were asked - actually took the model, adopted it pretty much without any significant change.
But the approach they took to the documentation was much more straightforward. So if you look at the concession, standing concession in Abu Dhabi, for example, it is 50 pages long. We drafted it, but it is 50 pages long. If you look at the approach in France, again it’s a lot more straightforward, the process, and there is much more flexibility built into those. I think almost like football, we gave the game to the world, I think when PPP comes back to the UK, some of the ideas that are brought back I
think will help us to develop a better model.
Gershon Cohen: I think so. I think it is less rigid in more models that evolved, so France does have different models. More models have emerged, perhaps, because there is more flexibility. I think we started off in a quite precise way, which I think maybe that is what has limited people wanting to feel there is room to be flexible.
Mike Gerrard: We could have a whole seminar on what is meant by flexibility, because I think it is quite easy to use a term like flexibility and you have to sort of unpack it into: do I really mean just using a decent change control, do I mean amending contract or do I mean actually having the right to completely change my mind about what I want. There are different interpretations.
David Lee: There’s also the process, though, Mike, isn’t there? If you look at the US process, it is very much a bottom up process as opposed to top down when it comes to coming up with deals, for example. You are bound to have a much more flexible approach, so sponsors will approach the public sector with ideas as to how to deliver transactions. But they do borrow the drafting. They borrow the drafting from SoPC 1, 2, 3 and 4.
Mike Gerrard: You see, one of the issues that you will have seen around in the public domain that is high up on our agenda at the moment is the whole issue of competency in the public sector as regards contract management, commercial skills, even managing the contracts we have, where the NAO has done a number of studies now.
Therefore, if that’s where we are now, all these ideas about flexibility, which, you know, conceptually sound good, they put more and more pressure and burden on the capability and capacity of the public sector to be a good, smart commercial client to deal with what are quite sophisticated issues. Now, where is the evidence that says we’re ready for that next upgrade in sophistication? That’s the
nervousness you’re going to get back.
Rod Morrison: Richard.
Richard Abadie: I have some thoughts on the funding market, but just on SoPC 4, having spent some time working with Mike on it at the time, it’s guidance, it’s not a standard contract. There are certain standard contractual clauses in there and I think as an industry we have got into a position where we have developed it into a standard contract.
I pick up on David’s point, it is not particularly flexible, which is not helpful. In other words, if anybody wants to debate any of the points, there is very limited acceptance from the public sector about variations. Wherever I go in the world, the commercial risk allocation principles are the same. I think if we want to move to a more corporately funded model we have to tear up the contract altogether.
We are either doing limited recourse project finance or we aren’t, and if we aren’t then we have to literally revisit the model. Maybe we’re talking something like the utility sectors if we’re talking about corporate finance in its broadest sense, but the infrastructure markets, most infrastructure that I see happening around the world, and of course Europe is included in that, is being done on a limited recourse project finance basis, using the risk allocation principles.
SoPC 4 has got some bad press, but the underlying risk allocation in there is pretty much what you see anywhere in the world. You can have a debate around the fringes but I don’t see the current market being segued into corporate deals. It will need somebody like your fund, Chris, to behave very, very differently - significant borrowings on your balance sheet, significant investment into sectors. You would have to reform your business in a slightly different way to achieve the same outcome.
Rod Morrison: The debt funding market for projects around the world, are you seeing that is adequate at the moment?
Richard Abadie: I want to pick up on a couple of points, Rod, and I fully agree with most of what Gershon said. We’re not seeing upward pressure on margins in particular. Margins, if anything, are fairly stable at the moment; predictable, we know pretty much what we’re going to. What we are seeing, given some of the crises in some European countries, is a significant increase in liquidity spreads from some of the funders, and I wish it were only banks.
Even if you speak to the EIB these days, it is starting to quote liquidity costs, so the effect of all-in cost of debt is increasing due to those liquidity pressures. I think that’s one fairly obvious outcome. So, it’s not the margins themselves, but there is a degree of transparency now around liquidity.
I think the other thing is we almost have a two tier banking market. One state-owned or state-sponsored in some shape or form, state-supported, and it’s not the UK I’m picking on, so it’s not about Gershon and Lloyds, it’s about the whole market, the whole European
market. We are seeing across Europe a lot more support from banks that have some form of state intervention and support in them in terms of hold levels, in terms of appetite to take risk.
Then you are seeing banks without that state intervention in them, and we could debate probably at length in this group as to why that’s the case. My guess is that some of the opportunities that these purely privately held and owned and sponsored banks are finding in other markets more attractive project finance at the moment, so the trade-offs for them are a lot more stark than some of the state sponsored banks and state supported banks.
So we are starting to see - I wouldn’t say it’s a bifurcation of the market, but we are starting to see almost a two-tier system starting to develop. I guess the perennial problem I have, and I do fundraising for sponsors, is just right now around the size of these holds.
If you go and speak to any bank in the market, you are still getting a lot of feedback around €50m final holds. That was probably true up to about two months ago. I think what we’ve seen literally in probably the last month is a lot of banks starting to express appetite for 100, 150, 250 million euro and pound size holds, so clearly there must be some liquidity coming into the market.
I don’t know where it’s coming from, but maybe it is picking up on your point, Gershon, that maybe it’s the secondary market debt sales. Maybe you guys are seeing stuff that we in the primary markets don’t have access to, but some things are encouraging banks to take bigger hold positions and they can only be with a view to selling them down; more confidence than ability to sell them down.
I guess the next bit from there is hopefully at some point in time the syndication market redevelops on the back of that. But, again, there’s no real evidence of that.
Two other comments I wanted to make: we’re in the interesting time. Everything is being rated now; it’s not just the project. Banks are looking at the credit quality of the sponsors, the EIB is looking at the credit quality of the banks, sponsors are looking at the credit quality of the banks.
We’ve been involved in a couple of deals internationally, not in the UK, where there are future funding obligations from the banks, ie, future drawdowns, and when you speak to the sponsors that’s a chief concern of theirs as to whether the bank, actually, two or three
So it’s not only the rating of the project, it’s not a question of whether the project is BBB, you have to look at the credit quality of everybody in the structure, all the stakeholders, and that’s becoming core.
So if you do some European projects, you will see the same names keep on cropping up on some of the bigger deals. The reason is that they are strong sponsors and they are able to attract strong support from the banking market, whereas on smaller deals, I would say sort of up to €300m, anybody can play. The moment you start getting above that threshold, there are a limited number of sponsors that are prepared to actively pursue those transactions.
Just one other thought. Chris. I was interested to hear from you around the bond space; you were mentioning you were seeing more activity. From our side, I’m just not. I’m hearing a lot of talk, and I’m interested to see what Marc has to say around this. I am hearing a lot of talk about alternative structures around the bond market, some banks are looking at wrapping construction risks, some banks even prepared to wrap bonds during the construction phase.
There is a lot of chatter around that space. But until we actually see a deal close, I don’t see how in Europe specifically we’re going to get bonds as a mainstream funding source until we find a monoline type replacement.
I was in the US last week and they have just closed the LBJ highway using PABs - private activity bonds - so clearly the bond market is fairly active there. They are unwrapped tax bonds - it’s like municipal finance, it has a tax benefit to it, but there the pricing is at 300bp over, so it is comparable to bank debt. Maybe in a deeply liquid market that’s accustomed to heavy investment and infrastructure through the bond markets, like the US, you can do it. But I’m interested to see how Europe overcomes that.
David Lee: Just before you move on, what about the Royal Canadian Mounted Police deal?
Richard Abadie: North America is fine. I guess that’s my point. In North America you have significant appetite. I don’t know who the buyers were of the bonds in Canada, but if you look at the US and Canada, it has a significant unwrapped bond appetite.
Marc Bajer: It is private placement, insurance company private placement.
Richard Abadie: It is mainly via the placement market that people are prepared to do the credit analysis on the proposition and take and buy and hold the debt. We don’t have the same capacity in Europe, effectively, to do that and it’s a problem. I don’t have the answer. I’ve had lots of people throw ideas at us, and I’m sure at all of you as well, but I just haven’t seen the catalyst that is going to change that market, and we all want it.
The alternative, of course, is to give the banks effective relief through securitisation structures where you can effectively sell down your debts into the capital markets. In my view, it may not be a primary source of debt, but it sure as hell should be a secondary source of debt.
Just one last comment on TIFU. I think somebody asked the question about what is the life of TIFU. I guess I have two observations on that: one is we were advising Greater Manchester Waste, so we actually used TIFU and we’re delighted, clearly, that it came through.
I guess two things make me think TIFU will never lend any more money again: one, effectively government is constrained in terms of what it can borrow. The only way it funds its loan into a project is to access funding itself. So from a pure financial constraint point of view, I can’t see government going out and borrowing and lending to its own projects because of its own borrowing constraints.
The second thing is very, very clearly from the commercial bank market. We’ve had fed back to us that if TIFU joins a deal, that is a sign of failure of the banking market and the other banks in the group will struggle to get back to their credit committee and say: “This is a good deal, we should continue to lend to it if TIFU is the lender.”
So my own personal view is we will not see TIFU lending to another transaction in this country, because you’ve got problems from government in terms of supply of money and problems in the co-state holders in the commercial banking market not really wanting to be in the deal. So, I think it has served its purpose. The reality is we do have liquidity in the markets able to fund these and we shouldn’t bemoan the fact if TIFU doesn’t lend anymore it is a sign of success rather than a sign of failure.
Rod Morrison: James, Skanska is one of the largest sponsors in Europe.
James Butters: Yes, for us there are lots of things to think about that came from all of the previous speakers, but for us deliverability has obviously been very important. Over this period it’s been nerve-racking because you are worried that the banks might not turn up. We do have significant problems across the banking market. We have, all of us in the construction, counter-parties involved in bonding and whatever else that downgrade regularly. This becomes a problem.
It is highlighting some of the inflexibilities of our monoline wrapped bonds, to be quite honest, and unfortunately it highlights, again, some of the strengths of the bank product. So what we actually find is if your job is to go and find finance to get something built and then to pay that finance back - which is largely in our hands once we operate - it is actually easier to go to banks than get banks to turn up and lend.
That is because they are lending and they are taking long-term lending positions. At the moment, there isn’t a huge incentive to look at trying to put anything in that’s innovative, because we are simply being told it is value for money issues, it is cost issues and it is to get there and get the financing in place within the timetable for the public sector clients.
So in many respects the argument about whether or not the bonds come back for us is academic. Clearly, there are some benefits to long-term financing if we are faced with the threat on a larger project of a mini-perm. A mini-perm clearly is not something we would like to look at, so we have an enforced short-term or, in a sense, heavy incentivisation to refinance, that clearly is a big disincentive for us.
But for a lot of the bread and butter deals that come through, actually bank financing fits the bill and makes actual operational running of the projects easier. Variations are easier, waivers are easier, dealing with an administrative team within a bank that have 100 deals on their books actually is a hell of a lot easier than dealing with a monoline that has fewer deals on their book.
Rod Morrison: Are you able to have competitive tension between banks at the moment?
James Butters: At the moment, I think the banks tend towards being competitive, it is in their nature to try and be competitive. I think they are being restrained in terms of pricing and covenant packages by what seems to be a revamped credit offering within the banks, or credit position. You see certainly more involvement of some of the more administrative departments of banks in transactions. You see that coming through in terms of decision-making on certain key risk points, in security package and in pricing.
Is there a competitive tension? I think there is the hint that it might be starting again in the UK market. You see banks wanting to look to try and accommodate the desires of ourselves and the clients in terms of driving prices down to make deals affordable, but I don’t think we are quite in what I could call a competitive state as yet.
Rod Morrison: Marc, you are innovative, apparently.
Marc Bajer: Yes. The big take that I have noticed so far from today’s discussion is that there’s really no competition with the banks that exist in today’s market. That has its disadvantages. I think the banks have a big role to play in today’s market. They’ve played a huge role in the last three years when the bond market collapsed, and I think they have a big role to play going forward as well.
So I don’t think that any kind of new solution - which is what we’re offering into the market - is designed to replace the banking market. How could that happen unless there were 20 Hadrian’s Wall Capitals operating at full steam in today’s market.
I think what we have concluded from all the work that we have done is that regardless of what the bank’s position is today, that position will continue to change over time. Basel II is now, of course, upon them, and Basel III is on its way.
I heard some very interesting commentary last night at a conference where a large French bank will continue lending because it doesn’t believe Basel III is going to come into being at all because that happening would hurt it. I said: “Well, it’s not much of a business plan, but fine, if that’s what you are thinking then great.”
I think the view we have is that there is very substantial room in the market for a solution that brings the bond market back as an investor in projects. Is it going to do every project? Absolutely not, nor would I want it to. Is it suitable for certain types of projects? I think James has alluded to areas where our solution really can work, but the main point is that there’s enough room, there’s enough projects, and the market is big enough for a new solution to come into being and for it to work.
Now, we have spent a lot of time with all the sponsors and contractors figuring out what their problems are. Investors simply don’t get what they need, which is why there is no bond market. They don’t get the ratings they need and they don’t get the asset management intermediation that they need in order to buy these bonds.
I think governments and supras are definitely looking for alternative financing other than banks so that it will reduce reliance on potential TIFU lending, because the market will then be that much deeper. The collapse of the monoline industry - and make no mistake, I was the CEO of Assured Guaranty International, I believe Assured Guaranty is still AAA rated and is the only institution among the monolines that is - but the fact is that the collapse of that industry I consider to be kind of quasi-permanent. I don’t think it is going to come back any time soon.
But, nonetheless, there was a very substantial role that industry played when the market was healthy, and essentially we are just trying to come in and fill that gap by providing credit enhancement, but in a totally different way that doesn’t rely on counterparty risk to an insurance company, which, as James and many others know, has not been a very good thing for many counter-parties throughout the credit crisis.
There is a singular lack of finance that is being provided by the natural providers of this finance. These are the pension funds and the insurance companies. They are completely out of the market. The only access they have is to banks wanting to resell their loans to them and, of course, most of the loans that the banks are trying to sell to them are not suitable, which is why that market hasn’t really worked out. They are not suitably rated, they are not suitably enhanced and, as a result, they simply can’t buy them.
As I mentioned earlier, I was at a conference last night where several large-scale pension funds and insurance companies said: “That’s why it’s not working, we just don’t get the ratings we need and we don’t get the intermediation we need from an asset manager who is going to manage the project and make sure that it works.
So we think we have a solution. We think it is not the only solution - at the moment it appears to be the only solution - and we do have supernationals, interestingly enough, that are going to be investors in our funds, so obviously they believe - and talking with their wallets - that there is going to be a need in the market. That is a need that we can fill.
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