Banks are being discouraged from big project-finance deals by new global capital rules and the eurozone crisis, according to market participants, who say infrastructure schemes will increasingly be funded by investors.
Standards ordered by the Basel committee of international regulators will make large long-term loans harder to hold on banks’ balance sheets, according to several senior bank executives in the U.S. and Europe.
Project finance loans to build power stations, wind turbines and bridges are particularly unattractive because of their size, tenor and illiquidity, the executives said. At the same time, troubled European banks, which have dominated the market, are pulling back — shrinking their balance sheets and shying away from new dollar-denominated loans.
But there remains an appetite for project finance loans to build infrastructure, with $298 billion of debt financing last year, according to Dealogic. One senior European bank executive said he was retreating from the market and he expected both emerging market institutions and the capital markets to pick up the slack.
Tyler Dickson, head of capital markets origination at Citigroup, said his bank is looking to make the best of the new market pressures by driving more of the loans to investors. “We need to convert the market from a bank-driven ‘buy and hold’ to a bridge market with a healthy capital market presence,” he said.
The push by Citi, which believes it can reap fees at different parts of the process, from origination and syndication to derivatives deals and advisory work, is one example of the many changes to banks’ business models driven by the new financial rules.
John Anderson, head of corporate finance origination at John Hancock, the life assurer, and a buyer of syndicated project finance loans said: “There has been both bank financing and fixed-rate bond financing supporting the U.S. project finance market for some 20 years, but the banks have had the bulk of the market, and predominantly European banks.
“Will that bid from Europe be pulled back? We’ve seen some of that from some of the state-owned institutions when their governments have effectively said: ‘Your job is to support industrial development at home, not in North America.’”
Citi is betting that more investors like John Hancock will want to replace the banks, believing that the long-term assets can be distributed to investors, particularly insurance companies that want long debt maturities to match their liabilities.
“Historically, many banks believed these assets were less risky and took the approach of holding and often forgetting about them,” said Nasser Malik, who runs project finance at the bank. “But ultimately this paper should find its way to investors and we believe Basel III will be a catalyst that will change the market.”