The Capital Markets Platform is a flexible financing solution that has the ability to broaden and deepen the pool of debt capital available to finance public-private partnership (P3) projects and efficiently refinance these projects over their lifespan. It was recently used in the Northwest Connect Anthony Henday Drive project in Edmonton.
Moody's Global Project Finance Group recently released an update on global infrastructure projects, noting that "the underlying fundamentals of the global infrastructure sectors generally remain very solid, but we are operating in an environment of frozen credit markets, requiring redoubling of analytic effort and focus given the impact of the credit crunch on demand growth, availability of credit facilities and liquidity, and analysis of refinancing needs..."1 If the underlying fundamentals of infrastructure sectors are strong-governments continue to require new infrastructure-do the liquidity and re-financing challenges facing the P3 model of delivering the required infrastructure militate in favour of governments moving away from the P3 model to the traditional model of procurement of infrastructure?
In order for the P3 model to compete with the traditional model of procurement in the current credit market climate, the P3 model must manage the increased financing costs that flow from the credit crunch and also find financing structures to satisfy governmental granting authorities that they have sufficiently committed financing to complete proposed projects-or at least the flexibility to provide for such financing.
Up until the summer of 2008, it was relatively standard for governments to insist that project sponsors have debt commitments for the entire term of a project agreement, which could be thirty years or longer. With the recent seizing up of the credit markets it may be difficult for project sponsors to arrange debt financing with such long terms, and therefore refinancing risk is increasingly a factor at the bid stage. Project sponsors that can put together flexible financing structures that will mitigate the refinancing risk, and give governments confidence that the project will be fully financed so it can be delivered on time and on budget, will have a competitive advantage in the bid stage of RFPs. Project sponsors also have to find creative ways to deal with the liquidity squeeze. Liquidity issues are putting pressure on project sponsors to structure debt solutions that incorporate different debt products from debt providers in different markets (bank loans, bonds, sub-investment-grade debt, etc). One such financing structure is the Capital Markets Platform.
Capital Markets Platform
The Capital Markets Platform is a flexible financing program capable of accommodating a variety of corporate debt instruments and borrowings, including term bank debt, revolving bank lines of credit, privately placed debt securities and interest rate and currency swaps and other hedging instruments. The project company and a trust company enter into a master trust indenture, which establishes common security and a set of common covenants and representations by the project company for the benefit of all debt providers under the Capital Markets Platform. Bonds are issued under supplemental indentures to the master trust indenture either as obligation bonds, to directly evidence the indebtedness of the project company to the holders of such bonds, or as pledged bonds, to be held on behalf of the holder as security for the indebtedness specified in the pledge. Typically, privately placed debt securities will be in the form of obligation bonds, while all other indebtedness of the project company under the Capital Markets Platform, including bank indebtedness, obligations under letters of credit, and obligations under derivative instruments such as interest rate and currency hedging agreements, will be secured by pledged bonds.
The Capital Markets Platform permits debt providers from different segments of the debt markets to provide credit to the project company under a harmonized debt instrument (i.e. the master trust indenture), thereby mitigating the risk that one credit provided by one such debt provider would inadvertently trigger a cross default. Furthermore, the master trust indenture provides a comprehensive document that increases transparency to each of the debt providers and facilitates compliance by the borrower. This increased transparency and reduced cost of compliance creates efficiencies both for lenders and borrower as well as for the governmental granting authority, since they are only required to understand a single master document instead of series of complicated debt instruments that may not work smoothly together. With the pool of debt capital potentially available to the project company thus enlarged, the squeeze on liquidity is mitigated. The Northwest Connect Anthony Henday Drive project in Edmonton that recently reached financial close is a good example of how the Capital Markets Platform facilitated a financing solution to provide sufficient debt capital (in the form of senior bank and bond debt) in a credit environment where the syndicated banking market alone may not have been sufficiently deep to provide the required capital at acceptable rates.
As mentioned above, term bank debt providers may be less willing in the current credit environment to provide term debt facilities that match the long periods required by many projects. This mismatch between the term of the debt facility and the term of the project agreement creates refinancing risk, a risk which project companies absorb but which governmental authorities are also mindful of, since ultimately they must ensure that their constituents have the benefit of the infrastructure for the entire term of the project agreement. The flexibility of the Capital Markets Platform, with its capacity for the issuance of multiple tranches of debt, allowing the issuer to quickly and efficiently access the debt capital markets and the syndicated bank markets, provides a structure to manage and mitigate refinancing risk. By facilitating efficient access to the debt capital markets, the Capital Markets Platform provides the opportunity to lower refinancing costs.