We’ve always had a very successful infrastructure practice and primarily the European infrastructure market has been built up on bank debt solutions. One of the struggles has been with the credit rating agencies leaving the market, how to get project bonds into the market. The Aberdeen Western Peripheral Bypass is complex in its structure because it was 50% debt funded by EIB so you have Development Finance Institution money which was very close to the 50% threshold that might give somebody a majority on voting. You have of the remaining 50%, you have somebody that has 36% (Allianz) and then these were the people that were purchasing the bonds and then 60 million of commercial debt for the remaining piece, so for what was a 600 million debt ticket, you had almost all levels of complexity involved in developing the project.
So traditionally, the perceived difference was the complexity that green field development projects require in the construction phase and decision making and the difficulty that a bond solution has in being able to adopt that decision making process, and so lots of the concerns on the bond side have not been “is infrastructure the right space for a project bond?” it clearly is, these are very conservative yielding assets very often in very safe jurisdictions, so they’re exactly what you’d expect a project bond to be applying to. The issue has always been “how do we get through the construction phase?” which is perceived as risky.
Now for those decisions, the decisions as to apply an overrun or deal with a variation to cure a problem there is now a fairly well-trodden path post Aberdeen - that we have a monitoring advisor whose role it is to assist in key decisions, so if there are decisions that are fairly low level, that require quite immediate response or a lack of criticality from lenders that the monitoring adviser will be able to assist the bondholders in making that decision. So that is useful too because it brings an advisor on board. Secondly, there is the concept of a bondholder representative, so if an entity through its own, itself or through its portfolio retains a certain percentage of the bonds then this idea of a bondholder representative that is able to act on behalf of the noteholders and is assumed by the noteholders to act on its behalf because it has an ownership of greater than X. That allows for a more efficient decision making process; in much the same way as a lead bank might act on behalf of institutions to which it has sub-participated; a majority bondholder representative is able to make decisions on behalf of everybody in buying the others.
And so those two together have allowed us to adopt a far more traditional decision making process on recent deals than you may have seen, and also allowed, which is critical, bonds to co-exist with debt because usually the decision was one or the other and I think now Aberdeen is proof of the fact, not only is it one or the other but it is money, commercial bank money and bond money all co-existing with the same decision making regime. That’s why so much of the time on these deals is spent examining the intercreditor relationships and how they work, but I think now I would be surprised if there was much movement from the landing on Aberdeen on future deals.
So if you look at the European market, if we step back, when we all started doing the initial project finance deals in 1999 (the PPP, PFI deals), EIB were one of the players but they were very much commercially driven and using the PFI, PPP program to stimulate economies. That model was applied almost throughout Europe and is still successfully being applied. What’s very clear now is that there is some illiquidity, lack of liquidity in the commercial bank market and also that certain projects are better suited to an alternative product and EIB, who are one of our clients on Aberdeen but also one of our clients broadly of the firm, are leading an initiative to try and encourage this new infrastructure plan (what’s more commonly referred to as the Juncker Plan) being developed across Europe.
There are various options in the Plan as to how it might be applied, but if a first loss payee piece is applied where they take the first loss of X should there be a problem with the project, that clearly assists with credit as a form of credit enhancement with the credit rating process. Clearly we will then have discussions about decision making, which again links back to the intercreditor point we discussed beforehand. An alternative to credit enhancement might be putting in a mezzanine piece for a portion, again, EIB have quite a long history of mezzanine financing into different markets and we’ve worked with them on a variety of those, so again, same thing, assists with credit enhancement and some political stability. I think rather than a one structure fits all solution, we might very well see a variety of structures in order to achieve the different proposed projects within the Juncker Plan.