Project Finance 2016: Roundtable

Who’s Who Legal brings together Lance Brasher, Ira Eddymurthy and Philip Stopford to discuss issues facing project finance lawyers and their clients in the industry today, including the effects of the recent drop in commodity prices, the future of yieldcos, the current state of legal competition and the availability of funding for projects in emerging markets.


Is financing available for projects in new markets such as sub-Saharan Africa? How are banks approaching these projects? Do they need a pledge from the host government? What other factors might impact their decision to support a project or not?

Lance Brasher: Financing is available in sub-Saharan Africa markets; however, projects generally require some form of host governmental support, World Bank support and financing from an export credit agency or multilateral lender. We have seen limited involvement of commercial lenders. The US Trade and Development Agency has been active in helping with the development and financing of projects in sub-Saharan Africa as part of President Obama’s Power Africa Initiative.

Ira Eddymurthy: In the Indonesian market, foreign banks and export credit agencies dominate project financing. There has been discussion and some regulatory efforts to get local banks more involved, but this has yet to happen in any significant way.

Cooperation between the government and the private sector under public-private partnerships for infrastructure projects requires the participation of the Indonesia Infrastructure Guarantee Fund, which was specially established to support infrastructure projects as a guarantor.

Philip Stopford: While financing remains available, commercial lenders are tending to stick to more proven markets and projects, and we are seeing an increasing need to have ECAs and DFIs step into projects early on in order to stoke commercial bank interest. Having said that, we are also seeing new lenders emerge into the mainstream including Chinese and Indian banks, which to date have tended to follow and support companies from their domestic markets in their expansions into sub-Saharan Africa.

From a lender perspective, clearly pledges and the suchlike from governments are welcome, but we are also seeing governments looking to create a better environment by passing legislation supportive of investment, such as the LNG Decree Law in Mozambique, and similar reviews of legislation in countries such as Tanzania and Kenya, to reduce the uncertainties and unnecessary hurdles posed by legislation put in place at a time that big-ticket projects were not contemplated.

How important is credit enhancement in this market? What forms of credit enhancement of project bonds have you seen used?

Lance Brasher: Credit enhancement has been essential in sub-Saharan Africa and central government support and the World Bank are instrumental in providing the needed credit support for off-take agreements. With respect to credit support, we are seeing efforts to negotiate some form of put arrangement in the event of payment defaults.

Ira Eddymurthy: Credit enhancement is well supported by the government of Indonesia to reduce credit/default risk.

The Indonesia Infrastructure Guarantee Fund provides credit enhancement in the form of a Guarantee Agreement (credit guarantee) for infrastructure projects (for public-private partnership).

Philip Stopford: Through 2015 and into 2016, the emerging trend of internationalisation of the sub-Saharan Africa bond market has continued, with the bond market progressing from sovereign or quasi-sovereign entities to a more diverse set of financial institutions and corporates in the more developed markets. We have seen development of a hybrid market with aspects of Eurobonds and high-yield bonds, and we are hearing discussions and anticipate further bond issuances with credit enhancements ranging from relatively straight forward structures (such as multilateral bank support (including guarantees and also subordinated loans or contingent credit lines)), to more involved structuring such as incorporating put or call arrangements, or linking into growth metrics such as the value of forward deliverables.

There are, of course, analogous programmes and schemes across the world that provide some guidance as to directions these developments may take, such as the Europe 2020 Project Bond Initiative being implemented by the European Investment Bank.

Which sectors were targeted in 2015 by companies and investors? How have low commodity prices affected investor appetite for projects in the energy sector?

Lance Brasher: There remains a very strong appetite for renewable energy projects, particularly projects with proven technology and long-term contracted output. Policies in the United States, including tax credit extensions, as well as policies in other countries, are very supportive of renewable energy. At the same time, the competitiveness of renewable energy continues to improve as costs decline. There is a wide range of buyers for renewable energy projects and companes, from those seeking development pipelines to those seeking contracted operating assets. Some of the buyers are those that would otherwise be looking for transportation infrastructure projects or projects in the oil and gas and midstream sector. They are turning to renewable energy which they see as stable given the shortage of transportation infrastructure investment opportunities and the weakness in the O&G sector.

Ira Eddymurthy: The industrial sector remains the largest contributor to Indonesia’s GDP growth, especially energy and manufacturing. One indicator that shows investor appetite for Indonesia’s industrial sector is the significant rise in hectares of industrial land taken up in Greater Jakarta, the capital of Indonesia, since 2010.

Low commodity prices could dissuade foreign investment in more expensive offshore and enhanced oil recovery. Indonesia, as the largest energy producer and consumer in South East Asia, has felt the impact of lower energy prices since 2015, though different regions across Indonesia have been impacted differently. Java island, which has no coal and limited quantities of oil and natural gas, has benefited from lower energy prices, while low commodity prices, especially for coal and metals, have hurt Indonesia’s Sumatra, Kalimantan and Sulawesi islands, where reliance on resource extraction is greater and sectors such as private consumption, services and manufacturing are comparatively underdeveloped.

We do not see that low commodity prices are the main challenge for investors in the energy sector. The main challenges are a lack of regulation or confusing regulation in specific energy sectors affecting licences, prices and foreign ownership, a lack of legal certainty, complex bureaucracy, inadequate infrastructure and geographical challenges.

Philip Stopford: We continue to see strong interest in renewables, infrastructure and LNG. Across both sub-Saharan Africa and elsewhere globally (eg, many parts of Asia), there has been increasing recognition on a policy level of the need for infrastructure as a precursor for growth, and there has been increasing emphasis on this from multilateral lenders, and also newer lenders/investors, particularly Chinese, into sub-Saharan Africa.

One good example of the current trend is the multiple large and exciting projects in Mozambique that involve development of natural resources (LNG and coal), simultaneously developing required infrastructure (rail, port, power etc), with an eye to such developments supporting future downstream investments and economic growth. I am delighted to be personally involved in a number of transactions in Mozambique and Nigeria that should combine to create a critical mass of growth opportunities in addition to the benefits of the projects themselves.

With many yieldcos now trading at half their peak prices, what’s next for them? Will appetite for yieldcos return?

Lance Brasher: I believe appetite for yieldcos will return. The degree of success of existing and new yieldcos may turn in part on the prospects for the related sponsor. Companies developing or owning portfolios or seeking to own portfolios continue to look for ways to efficiently financing them, including methods to aggregate capital.

Ira Eddymurthy: There are currently no yieldcos in Indonesia and it remains to be seen how yieldcos might develop. Indonesia’s renewable energy sector is still growing.

Philip Stopford: Yieldcos have a clear economic rationale in allowing investors to invest in the operating phase of the risk cycle of projects. However, similarly with oil and gas MLPs that preceded them and certain analogous derivatives products before that, in order to maintain their value and attractiveness to investors, there needs to be a disciplined focus on ensuring only the right projects and assets are put into the yieldcos and that integrity of asset value is maintained. This is particularly important in a rising yield market.

The wide fluctuations in prices of yieldcos seen recently are concerning, given that the avoidance of such volatility is a large part of why investors have looked to yieldcos in the first place. Therefore, while we would anticipate that there will be a rebalance and certain appetite for yieldcos, continued interest in this market will require that greater efficiencies and better management be achieved, combined with strong counterparties.

How does competition lie among law firms practising in the project finance sector? How can law firms differentiate themselves from competitors?

Lance Brasher: I believe the culture of a law firm is key to the service a client can expect. It is more than a collection of lawyers located in various jurisdictions or with particular skills and experiences. Clients will benefit from a culture of dedication to excellent client services and the highest ethical standards. This is Skadden’s culture. Our firm’s culture fosters collaboration, problem solving, creativity and efficiency. Our “one firm” approach and global footprint help drive efficiency and maximisation of resources. Skadden operates on a fully integrated basis without operational or jurisdictional boundaries, drawing upon the wealth of experience of our close-knit and complementary group of practitioners globally. It is our culture to strive to work seamlessly as a team to provide the best advice and execute matters in a highly efficient and cost-effective manner.

Ira Eddymurthy: Given the general regulatory complexity in Indonesia and the frequent uncertainty with how laws and regulations will be enforced in practice, and the unwritten policies in many government agencies, law firms must develop a sound network of trusted and informed contacts in government offices, so they can reach out to officials and confirm their understanding of laws and regulations, and then pass that on to the client. Firms that have worked on large and successful projects will obviously stand out from other firms in that they have demonstrated their ability to help clients successfully conclude project finance transactions.

Philip Stopford: The project finance market remains highly competitive, and law firms have to continually innovate and adapt to client needs. Relatively few firms have deep experience in large multi-tranche financings on a global basis, and while there are a number of firms acting in individual markets, very few operate on a global basis.

White & Case accomplished a unique feat this year by maintaining its reputation for complex, high-profile transactions globally, picking up several global and regional legal adviser of the year awards for project finance work in 2015, recognising our industry knowledge, practical expertise and global footprint and experience.

When we asked our clients and ourselves what differentiates White & Case in the market, three themes emerged: truly global; navigating complexity; and client commitment.

Having equal strength on the sponsor and lender side, as well as strength in the two major project finance centres – London and New York – combined with an ability to provide world-class service to clients on complex cross-border transactions: that is what allows us to differentiate ourselves from our competitors and makes us distinctive.

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