Project Finance 2018: Trends & Conclusions

Project finance remains a diverse and busy area for the legal practitioners we spoke to in our research. This year, interviewees reported renewed focus on energy, infrastructure and transport work around the world. The energy sector is an area of high activity as commodity prices have continued to recover and driven interest in conventional power projects, and governments and businesses around the world have focused their attention on renewable energy. M&A and restructuring activities have been common, and lawyers have also observed an increased use of a range of financial structures to fund major projects.

Market Overview

In the words of one interviewee, “Project finance is an area of practice that is very much influenced by the areas of the market that are being developed most,” and practitioners reported strong levels of activity in infrastructure and transport. Additionally, the energy sector is thriving around the world, particularly in relation to clean energy generation and project development.

The project finance market is very fluid, and lawyers acknowledge that “the active players in the market have changed so much over the years, and it is not always the same countries that attract investment”. For example, according to one practitioner there has been “a marked shift” away from jurisdictions such as Brazil and Chile to Central American jurisdictions “where more work is being done than ever before, which has stimulated activity in companies that have been dormant for a while”. This increased activity in the Central American region can be partly attributed to US policy focus on the so-called Northern Triangle of El Salvador, Guatemala and Honduras, say sources.

The past 12 months have been active in terms of M&A and restructuring, and this has had an effect on projects. Practitioners observed “a resurgence of M&A activity” in Chile, while Irish practitioners reported “a lot of restructuring elements in project finance work”. Similarly, in South Africa, “there is a lot of acquisition movement in the market”. On the restructuring side, lawyers in Singapore have been “heavily involved in restructuring as many financings have got into difficulty, particularly in the offshore oil and gas market”. Practitioners have been active in schemes of arrangement and disposal transactions, which “have needed a lot of attention in the past couple of years”. In India, meanwhile, “the big development” in this area has been the 2016 Insolvency and Bankruptcy Code and the implications of liquidations on potential bidders for projects. “This has involved a lot of heavy lifting”, said one lawyer. 

Good news comes from the USA, where “the industry feels more stable now after the spate of insolvencies in 2014 and 2015 caused by high-yield bonds”. Unfortunately, the same cannot be said for the UK, which has recently been shaken by the collapse of Carillion, the UK’s second-largest construction company, in January 2018.

Companies are increasingly looking to a range of financial structures to effectively finance major projects. Lawyers reported that upcoming projects “will likely be done through a combination of equity financing, private finance and balance sheet financing”. This trend is echoed in jurisdictions such as the UK and Singapore, where practitioners are “seeing a lot more private equity activity”. Similarly, in the US “the structures we’re seeing are rarely pure project finance”, with clients favouring hybrid transactions featuring a range of different structures. In these circumstances “deals share features of project financing and investment grade financing”, as one interviewee put it. 

Energy

Project finance remains “big business” in the energy sector. For instance, power projects “have driven the market” in Israel as the market moves from a government monopoly to private power projects. Although Portugal “has not seen huge infrastructure projects in the past”, lawyers told us of strong market activity around new projects and “an uptick in large energy projects”. In the words of one lawyer, “Investment in the energy sector has not slowed down – we have not stopped since 2014, either on the refinancing or the project finance side.” Meanwhile in Turkey, “The energy market is steadily busy, especially in relation to renewables.” In the US, lawyers commented that “the rules have been re-written because the US is now largely energy-independent”, and according to one practitioner in Texas, there is “a lot less international work going on right now”, which was largely put down to commodity prices and the price of oil.

Low commodity prices have plagued the energy market over the past few years, although signs of recovery are expected to stimulate project activity. In Chile, “project finance has been overwhelmed with energy infrastructure projects”, according to one source. This can be compared to the “depressed” mining industry, which has suffered from low commodity prices. However, “this will likely change”, said one lawyer; should the price of cobalt and copper rise, “we expect to see new financings and big projects in the mining world in the next couple of years”.

The current focus of the market is renewable energy projects and this is a priority area for governments the world over including Ireland, Egypt and Armenia. Despite President Trump’s attempts to promote coal, oil and gas in the US, interviewees told us that “there is a clear slant towards renewable energy” while wind, solar and storage transactions are also very active. However, progress in the area is steady rather than rapid: “Renewables are the pathway, but it won’t be a quick pathway”, in the words of one lawyer. Solar power is the hot topic, described as “the Holy Grail” of the energy project finance world by one interviewee, as “virtually all utilities projects have a solar component”. It is an area of heavy investment, and governments are committed to developing the sector through developing special regulation, introducing incentives and bringing solar power projects to the market.

In the commercial sector, clients are “very focused” and are showing a lot of interest in clean energy and renewable energy projects. International investors are active in the space, and practitioners expect “a lot of projects and financing from international customers” in the future.

Legal Market Analysis

In many large firms, project finance expertise sits within, or adjacent to, the banking and finance practice. As such, project finance expertise is a common feature in firms with strong banking capabilities. This prevalence of project finance teams “makes for a tough market and drives prices down” to levels which have been described as “unsustainably low”. This “sustained downward pressure on fees” is being felt in jurisdictions including the US, the UK, India and South Africa, according to those we spoke to. Clients are “focused on the bottom line”, reported one source, who added: “They expect lawyers to be efficient and manage the costs of transactions as best we can. This requires us to budget legal expenses and to make sure the work is allocated to the right level within the firm.” 

Lateral movement is common in countries such as the US and South Africa. US-based lawyers reported a very active hiring market in which “firms are paying top dollar to poach top talent”. Clients are actively seeking lawyers with specialist expertise in the jurisdictions and sectors in which they work, although “they like to get to know multiple firms so that there are viable alternatives in case of unavailability or conflicts”.

Conclusion

As the global economy continues to recover and commodity prices continue to increase, lawyers are witnessing renewed investment in major projects and express confidence for the future of the area. Financial structuring methods are becoming ever-more sophisticated, leading to increasingly varied and complex work for practitioners. Meanwhile, international investors are becoming more active and private equity firms are looking to deploy funds in the area. There is a great deal of activity surrounding renewable energy and infrastructure projects, which are sure to see huge developments over the coming years. Although there are variations in the amount of activity across jurisdictions, there is a generally positive global outlook for demand for projects, and this is likely to mean plenty of work for lawyers around the world.

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