Project Finance Trends 2016

The project finance space continues to diversify, as companies and firms alike look for ways to navigate the current landscape. Among other issues, 2015 saw practitioners tackle the aftermath of the drop in oil prices and a subsequent need to broaden their practices. The field has also been dominated by limited access to funding for projects, with companies relieving this pressure by looking to alternative sources of financing. Despite these challenges, the past year has witnessed an uptick in the number of renewable energy and infrastructure projects internationally, with global investment in renewable energy at $286 billion in 2015 – indicating a positive future for the market.

As was the case 12 months ago, the drop in oil prices continues to trouble the oil and gas sector. The beginning of 2016 saw a barrel of oil trading at just under $30 a barrel, a far cry from its value of $115 a barrel back in August 2014, forcing many companies to reassess their financial position.

Many lawyers, in a bid to retain clients, have found themselves shifting the focus of their practice towards M&A and restructuring, in order to continue meeting client needs. This overlap between project finance and other fields has become a core part of the practice area, requiring practitioners to diversify and adapt the services that they provide. Over the past year, the market has been dominated by restructurings, divestitures, M&A and bankruptcy work. Sources have commented on the increased number of assets (particularly in the oil, gas and mining sectors) changing hands, as well as other distressed assets, and are looking towards refinancing and restructuring as a means of easing their financial pressures – with a correspondingly broader scope of legal expertise required. It is evident that for many practitioners active in oil and gas projects, it is not the quantity but the type of work that has changed over the last year. As oil-production levels remain high, it is doubtful that oil prices will recover anytime soon, making it difficult for lawyers to gauge their next steps.

In light of this, attention has shifted towards cleaner energy, particularly the renewables sector. This coincides with a desire for governments to support and meet worldwide climate change targets, as was seen with the historic Paris Agreement in December 2015. With leading global authorities taking a step in this direction, it is no surprise that the energy-related projects market has naturally taken the same course.

This trend has been particularly prominent in Latin America, with the slow-down in the mining sector allowing renewable energy ventures to come to the fore, and even become the source of power for many of South America’s mining projects. Sources have noted the construction of many sizeable wind projects across Chile and Peru over the last 12 months, as well as an increase in solar projects. Indeed, Chile’s Codelco mine which traditionally ran on 67,000 barrels of diesel a year now functions on the energy supplied by 3,000 solar panels. The project finance space in Mexico has been particularly active this year, motivated primarily by nationwide energy reforms that began in 2013. The new developments – intended to promote renewable energy and energy efficiency, and to open many of its oil and gas reserves to foreign investors and competitors – have led to an increase in renewables projects across the country. Lawyers whose practices focus heavily on Latin American projects, particularly those based in the US, have noted this shift in their workload, from traditional power projects to regulation-driven ventures.

Although there has been a great deal of activity in the energy projects arena, 2015 has also seen an uptick in infrastructure projects globally. In Mexico, the government of Enrique Peña Nieto has continued to drive forward infrastructure projects, despite the collapse of oil prices, including plans for a new international airport for Mexico City. In June 2015, Indonesian President Joko “Jokowi” Widodo requested the acceleration of 10 priority infrastructure projects across the country, including the second stage of the Trans-Sumatra highway, and the Bontang refinery in East Kalimantan. Despite lamenting the slow nature of the implementation of these projects, sources have highlighted the increased interest in Indonesia from neighbouring legal communities, most notably Singapore and Japan, who are now looking to the country as a potential growth area.

In the US, 2015 saw a host of major deals such as the acquisition of the Indiana toll road by IFM Global Infrastructure Fund, and the acquisition of Chicago toll-road operator Skyway Concession Co by a group of Canadian pension plans for $2.8 billion. This burst of activity has led many lawyers to believe that they will see a rise in infrastructure projects, paving the way for a busy next few years for the legal community.

It would seem that the US renewables sector also has a few positive years ahead of it: in December, Congress agreed to grant multi-year extensions to tax credits for both wind and solar projects. Sources note that over the next year, an apparent slowdown in the sector will simply be a consequence of the easing of time pressures and a sense of urgency. For many US practitioners, these recent developments have given certainty to the market, and indicate a bright and active future.

Africa remains an area of great interest in the project finance space as economic growth across the continent keeps fairly steady. Coupled with the need for many African countries to develop their infrastructure and access to power, the continent has been the source of increased focus over the past few years. It would seem that 2015 has seen a shift in the key players in the market, with Chinese companies (who had previously been greatly involved in projects) taking a step back as a result of the recent slowdown in the Chinese economy. In October, technology giant Google built on its African presence by backing the Lake Turkana Wind Power Project in northern Kenya, and agreeing to purchase a 12.5 per cent stake in what will be Africa’s largest wind project, upon completion in 2017. This is Google’s second involvement in a renewable energy project in Africa; in 2013 the company invested £12 million into the continent’s largest solar PV plant in South Africa.

Practitioners have noted that the main challenge currently facing projects in Africa is the lack of available funds. They lament that although there is enough bank lending for potential projects, there has been a struggle to source the seed capital necessary to take it up to that certain point. The primary sources of large funding have come from organisations such as the International Finance Corporation, and the African Development Bank Group, which in 2015, disbursed approximately US$8.8 billion in 240 operations. US president Barack Obama’s Power Africa initiative continues to invest in Africa, with its outlook that power is the baseline for development, driving US-funded infrastructure projects on the continent. Whether or not such funding will continue after the upcoming US elections remains uncertain.  

The need for funding is one that has become a global issue over the past year, with lawyers noting the tendency now to turn to alternative sources of financing such as private equity funds. In the US, public-private partnerships have been very active, particularly in the renewables space, as a consequence of the withdrawal of traditional funding sources from the market. Sources have also observed a big move towards more highly structured financings, with lawyers now expected to deliver innovative and creative solutions to clients. Furthermore, many have remarked that the market has become much more reactionary, as financial sponsors look to specific portfolio investment openings, and make more targeted surgical strikes on distressed opportunities.

Despite what has been a busy and diverse market over the past year, practitioners have found themselves increasingly subject to fee pressures, with many citing it as one of the main challenges currently facing their practice. In corporate-driven markets such as the US it comes as no surprise, given the current economic climate, that companies are increasingly focused on cost, and keen to ensure that outgoing expenses are as low as possible. Indeed, this push to reduce expenditure has consequently led to a demand for lower and more standardised legal fees and structures. With the worldwide economy in a fragile and uncertain state, and many clients under significant credit stress, this would seem to be simply a product of the current global situation, and perhaps not a permanent fixture. Many lawyers remain optimistic however, remarking that although pricing is important for clients, it is not determinative, and that quality remains a true priority.

The market currently appears to be in a state of flux, and is increasingly dictated by commodities prices, access to funding and the state of global politics. The future looks bright for lawyers, who can expect the next few years to be busy and active. That said, versatility is the order of the day, as the need to adapt to the ever-changing landscape remains key to a successful project finance practice.  

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