Project Finance 2015: Trends

“Adapt and diversify” is the advice from leading lawyers worldwide with regards to the current state of the project finance industry. The significant drop in the price of oil, EU and US sanctions against Russia, and election years in emerging markets have led to many projects being put on hold or abandoned, and there are fears it could get worse before it gets better. It is a challenging time for all involved – from sponsors and lenders to the lawyers advising them – as the nature of activity changes. Project finance transactions for new oil projects are being delayed and it is expected that restructuring and distressed M&A work will pick up later in the year.

In the past six months, oil prices have plummeted by 60 per cent to $46 a barrel causing energy companies to cut spending on exploration and many projects to be put at risk. One of the highest-profile projects to be abandoned is Royal Dutch Shell and Qatar Petroleum’s $6.5 billion Al-Karaana petrochemicals project in Qatar. Shell cited “high capital costs rendering it commercially unfeasible, particularly in the current economic climate prevailing in the energy industry” as the reason behind the decision.

The project is not alone. In our conversations with leading lawyers it became apparent that petrochemical projects are being put on hold until they become commercially viable. Keeping the prices down is the oil cartel Organization of the Petroleum Exporting Countries (OPEC), which is determined not to cut production to prop up prices.

Lawyers are anticipating a remarkably different workload in the coming year. Distressed M&A is expected to be on the up as companies are forced to sell assets to generate cash, as is restructuring work. On the more positive side, opportunistic acquisitions are anticipated among cash rich companies looking to acquire assets at good valuations. Being able to offer clients insolvency and corporate expertise will be advantageous and firms with a broad focus and industry expertise are expected to benefit most from this shift in work. Having the ability to flex teams around the work available will be crucial to success in 2015.

Russia is one of the countries worst hit by the oil price fall. Following US and EU sanctions imposed in 2014, Russian state banks are excluded from raising long-term loans in the EU, and the EU will not export a wide range of oil industry technology. These sanctions in combination with falling oil prices are putting pressure on the Russian currency and the government has recently cut its growth forecast for 2015 predicting a sink into recession. Total recently suspended its joint venture with Lukoil in response to the sanctions; the project involved the exploration of the Bazhenov formation in western Siberia and was expected to begin in 2015. Furthermore, state oil giant Rosneft has launched a challenge in the UK to the legality of the sanctions which has now been referred to the European Court of Justice as of early February 2015. While Russia is hoping to bring its companies back on to home soil and into the state’s tax orbit, it also plans to find its own technology for the oil industry to continue alone with projects. The international law firms in Russia have suffered the worst with low deal flows forcing them to redeploy lawyers to other offices and in some cases let staff go. National firms are faring better but for all project finance work has taken a dive.

In Western Europe, project finance deal flow is also down across the energy and infrastructure markets. In H1 2014, activity was down 29 per cent from the same period in 2013 according to Dealogic data. Interestingly, this is not due to a lack of capital as was the case in the immediate post-financial crisis years; today, the problem is a lack of projects. As a consequence, when deals do come to market they attract significant interest, which is making the process highly competitive. Many lawyers we spoke to had worked on deals for unsuccessful bidders.

The one bright spot in Europe has been Turkey – which is fast positioning itself as the energy hub of the region. The foundation of the Trans Anatolian Gas Pipeline project was laid in March 2015 and there are currently 534 hydro plants being planned, 160 of which are under construction. Many London-based lawyers reported high levels of activity in Turkey in the areas of renewables and infrastructure. In particular transport projects are very active with rail projects under way and also the Eurasia tunnel project. 

Domestic work in the US is back, according to lawyers. Five P3 projects reached financial close in 2014 including Florida’s $2.3 billion I-4 Ultimate project and Texas’s $847.6 million SH183 managed lane project and its $104 million Texas A&M University student accommodation project. Unfortunately several projects were cancelled including Nevada’s Project Neon. Despite this, lawyers remain optimistic that they will see an increasing number of projects in 2015 including social infrastructure, rail, energy, bridges and tunnels.

While two of Asia’s most populous countries – India and Indonesia – had elections in 2014 which stalled activity, the infrastructure need across the continent continues to provide a slew of work for project finance lawyers, many of whom are located in offices in Singapore, Hong Kong or Tokyo. According to reports, inadequate infrastructure investment is possibly the biggest brake on emerging markets’ growth prospects, and while traditionally national government budgets have been the largest source of funding, estimated at 70 per cent, private sector investment is becoming an increasingly vital solution. Myanmar continues to be on the radars of law firms, financial institutions and sponsors, and upcoming opportunities in the power, transport and telecommunications sectors are hotly anticipated. 

Africa also continues to see investment. Amid the current difficulties in the oil sector, Total recently announced that its major African projects were safe. Much activity is also being aided by $7 billion of commitments from the US government under President Obama’s Power Africa Initiative. However, China remains the largest bilateral investor in infrastructure on the continent with $13.4 billion loaned in 2013, all directed at sub-Saharan Africa. Work in the region is handled largely by London, Paris or South Africa-based lawyers, with still relatively few lawyers on the ground.

The use of infrastructure project bonds is beginning to gather momentum and 2015 is expected to see a particular rise in the use of green bonds: fixed income, liquid financial instruments used to raise funds dedicated to climate-mitigation, adaptation and other environment-friendly projects. In May 2014, Crédit Agricole CIB worked with GDF Suez to structure and issue the largest green bond ever of €2.5 billion. The funds raised will finance projects in renewable energies such as wind and hydropower and energy efficiency including smart metering remote-control systems and heat systems. Moreover, the Asian Development Bank is also looking to promote green and project bonds this year with initial projects to be renewables or energy efficiency systems. In 2014, total new issuance of green bonds was around $40 billion.

The chart below shows the number of listings firms have achieved in the last three editions as well as back in 2007. It is clear that while the number of lawyers a firm has listed has changed from year to year, on average those with a greater number of highly recommended lawyers in 2007 have maintained a practice with a similar number of market-leading lawyers, demonstrating the top players in the market have maintained their positions. The exceptions are Clifford Chance, Latham & Watkins and Ashurst, which have each grown their contingents considerably since 2007. It remains a small legal market made up of the leading US and UK law firms and this does not look set to change any time soon, although firms with strong restructuring practice may see a slight benefit in the short term.

The project finance market is a creature of a myriad of factors including political will, global commodities pricing, political instability, transparency and the ability to dispute in a jurisdiction as well as macro events such as Ebola breakouts. Law firms have continually adapted to the changing workload as events at any given time dictate the projects at market and they will continue to do so once more as they face new challenges in 2015. The elite firms practising in this field are well equipped to adapt to changing workloads and this ability will be of significance in the year ahead as it helps them to counteract the fall in financing work for new projects.









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