Research Trends & Conclusions: Project Finance 2011
With the benefit of over 14 years of research and tens of thousands of votes from clients and private practitioners, Who's Who Legal takes a closer look at developing trends in the project finance legal marketplace worldwide.
Twelve months ago, in the midst of an uncertain marketplace, weak economic growth and tightening banking regulations, a cautious optimism emerged. Reports suggested that activity was slowly on the up, with credit markets beginning to thaw and activity in Asia, the Americas and India driving growth.
In our findings, we explore the extent to which these prophecies have played out, the impact they have had on the project finance community, and look ahead to what further changes are in store.
OVERVIEW
2010 was a relatively busy year for project finance practitioners: interviewees describe an increase in mandates and requests for proposals for large deals in a wide range of geographical locations starting to appear. The industry, it seems, is settling in to a “new normal” – a more muted credit market with project-specific financing being stitched together from multiple sources. The shift in activity has been very much east driving the west, with Asia and the Middle East both fuelling growth. According to figures released by Dealogic, project finance in the Middle East rose by 18 per cent and in Asia by 31 per cent in 2010, boosted by major developments such as the Jubail Export Refinery in Saudi Arabia and the KSK Mahanadi Thermal Power Project in India. Demonstrated below, our research uncovers elevated numbers of practitioners selected for inclusion in India and the UAE as their experience and expertise receives growing international recognition. As traditional centres such as the UK and the US maintain their hold, and the Asia Pacific performs very strongly, exploring this upward trend in greater detail we examine the project finance sectors that have contributed to the return of project finance and explore the emergence of new growth areas.
Fig 1. Countries with 10 or more nominees
LOCATION, LOCATION, LOCATION
In the 12 months since the previous edition, we observe the continuing globalisation of firms looking to reposition their international teams post the financial crisis. The Middle East and the UAE in particular provide a strong example of this. In an area where local relationships are essential and clients look to firms that can demonstrate they are invested in the region, international firms have been keen to continue to strategically strengthen their networks in order to attract key regional clients.
Competition too is increasing in the London market as a result of the growing prominence of US firms, a trend that several respondents expect to continue. With many project finance techniques originating from the US, practitioners have been keen to highlight the benefits of being able to use this background when exploring methods of funding in emerging markets.
The strength of UK firms in exporting their expertise however, is also clear from our findings; Clifford Chance and Allen & Overy stand out in particular, and as competition rises between firms globally, those practices with a strong positioning on the US, UK, Middle East and Asia will continue to be able to use this geographical reach to keenly watch deal flows and explore emerging markets.
Between the much watched BRIC countries, however, the project finance field is far from even. Activity in Russia and eastern Europe generally has suffered: infrastructure projects significantly affected by the financial crisis have struggled to recover, and many have been postponed. Lower levels of private investment have pushed projects toward relying on financing from government and state-owned companies that are subject to budget restrictions, further frustrating activity. Respondents highlighted the selective approach that investors are adopting and a reliance on the European Bank for Reconstruction and Development as a source of financing. Nevertheless, with the US$7.6 billion Nord Stream project – which will lay 1,220km of subsea offshore gas pipelines that link Russia and the European Union via the Baltic Sea – being one of the largest since the credit crisis, and a growth in projects estimated at the US$28 billion mark according to practitioners, there is certainly tangible scope for optimism as lawyers settle back in to a less inflated project finance market. Demonstrated below, after a fall in 2009 and recovery in 2010, practitioner inclusions have held their ground over the past year.
China and India have continued to steam ahead. Practitioners highlight an increasing prominence on the part of Chinese companies making enquiries in to, and financing, large deals in Africa and Brazil, particularly in the mining and metals sector and in India, the unrelenting demand for infrastructure projects continues. Our research uncovers a marked increase in practitioners China and India as both countries continue to experience growth and assert their expanding international profiles on the world stage.
ENERGY
Faced with rising levels of energy consumption and depleting natural resources, the energy sector, and renewables in particular, have played a significant role generating activity over the past 12 months.
Renewables
Respondents highlight the growing prominence of wind and solar projects worldwide. Several firms are aiming to bolster their renewables practices, a trend that Who’s Who Legal highlighted in the 2010 edition with California-based firms poaching technology experts to add to their capacity in the area. Against a backdrop of international political support for wind power, and alternative energy in general, the need to source funding for development through project financing is set to intensify with forecasts estimating that investments will reach around US$69 billion by 2015, with US$29 billion arising from the Asia Pacific region where supportive policies in Australia and India in particular are drawing lenders back to the sector. In Europe, after a somewhat tentative start, owing to the high costs and particularly technical complications in the financing and maintenance of offshore wind farms, lawyers across the region noted the growing trend toward offshore expeditions.
In the US, after attracting terrific investment in 2009 and 2010 as a result of favourable policies by federal and state governments, the withdrawal of these lines of financing has brought a degree of uncertainty for the future growth of renewable energy projects in the country. While interest in renewables has continued to rise, progress thus far has been disappointing according to sources. Of the several projects financed under the Department of Energy’s stimulus programme, only a few have reached closing, and as the Department of Energy announces that it has stopped accepting applications under section 1705 and that those applications submitted may not succeed, several hopefuls will need to return to the financial market to get their deals done. A lack of both greenhouse gas legislation at federal level and a national renewable energy portfolio, in line with these financing lines being withdrawn has led leading sources to anticipate a fall off in the “renewable energy boom” and a corresponding migration of projects toward emerging economies.
In India, the deficit between supply and demand continues to be a major area of concern, coupled with inefficiencies in power transmission and distribution systems. Sustainable energy technologies, particularly solar, are likely to play a vital role in overcoming these issues. With an average of 300 clear sunny days available, the country is an attractive prospect for international investment; and one that has been recognised by the government. Under the National Solar Mission announced in January 2010, the 20 GW of power called for by 2022, will require an overall investment of around US$70 billion stretched over three phases, and while nearly 70 per cent of India’s current capability of 500 MW module production is traded for exports, the government has mandated that only Indian made cells would be sanctioned under the National Solar Mission. Investor confidence is high: by December 2011 it is anticipated that generation will have begun for at least half of the target, the balance completing just a year later in December 2012.
Continuing interest in hydro energy further demonstrates the depth of the drive towards alternative energy. Contributors point toward a number of bids for hydro projects in Central America and in Europe with new legislation entering in to force in order to meet this rising development, and despite the tragic events that unfolded in Japan, political support for nuclear energy has also continued.
Mining and Oil & Gas
LNG expansion has increased challenges for sponsors and project finance practitioners alike. Owing to their high capital intensity, practitioners have been faced with piecing together multiple sources of financing and innovative financing structures. As Qatar continues to be a key player for this line of work, and as a market that has traditionally favoured club financing, the experience that practitioners have gained over the past 24 months putting together programmes of international lenders will be a valuable addition to their portfolio going forward. Participants have also seen an increase in large global mining projects, particularly on the part of Asian investors. Practitioners in Africa are experiencing growth in a broad range of areas. In Nigeria, the Petroleum Investment Bill is expected to further open the market and with some of the richest mineral deposits in the world, Nigeria will play a central role in the development of mining in west Africa in the coming years. Practitioners are benefiting from an increasing international exposure and the legal market is growing quickly as a result. Ghana too, is experiencing somewhat of an activity boom, although there are still tremendous hurdles for practitioners to overcome with financing from the World Bank still very much required. During our mining research, a number of practitioners expressed concern over growing degrees of protectionism, particularly in South Africa where recent talk of mine nationalisation, despite strenuous denials by the government, continues to circulate. With political approval forming weighty risk considerations determining the viability of future projects in the mining, petrochemicals and oil and gas markets in particular, and with financing harder to piece together than in previous periods, projects in emerging markets that are likely to generate quick revenue and have a lower risk profile have, understandably, further increased in appeal – many practitioners attribute the explosion in telecoms infrastructure project work in Africa, India and Brazil to a combination of these factors.
Infrastructure
Continued activity in infrastructure investment, particularly in the road and rail projects, has further contributed to project finance levels over the past 12 months. In addition to the tremendous demand from India previously highlighted, practitioners in Australia describe a very strong pipeline of PPP transactions. Repair work required further to the terrible flooding that hit the country at the beginning of 2011 is anticipated to require financing from the private sector and the recent natural disasters in Japan, New Zealand and the US too will see an additional stream of projects enter the market.
Infrastructure investments in Latin America have continued to see multilateral institutions and development agencies play a strong role. Informal alliances with local practices and international firms, in line with Brazilian bar regulations have continued as projects continue to grow, with tax benefits recently granted for infrastructure investments associated with the forthcoming World Cup in 2014 and Olympic Games in 2016. This is only part of the picture however, with projects in several sectors anticipated going forward spanning, roads, airports, mining, power plants and the pre-salt oil region, observers have expressed concern as to how the market will make the transition in to the global capital markets as a source of financing and move away from its heavy reliance on the BNDES, its national bank. It is worth bearing in mind, however, that project finance activity in Latin America overall fell in 2010 and, as demonstrated above in figure 1, even in Brazil, we see a corresponding decrease in the number of project finance practitioners included.
With practitioners describing a more robust pipeline for the projects market, in line with the prevailing economic environment, steady growth and alternative sources of financing will continue to feature. Competition between firms in developed and emerging markets is set to intensify, both in terms of securing project bids and lateral hiring between firms as international practices settle back in to a transformed financial and legal marketplace.
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