Raynor McMahon, Director, Structured Loans, Westpac Institutional Bank - Private capital funding...

Infrastructure Financing

with the Institutional Bank.

April 2014

Current Status of NZ’s Loan Markets

Banks’ Funding Costs

Source: RBNZ

7% 8% 13% 12%

33% 34% 22% 20%

59% 59% 64% 68%

Sep-10 Sep-11 Sep-12 Sep-13

Equity & Interco Wholesale Funding DepositsSource: Westpac

Indicative Margin Funding Costs Relative to OCR (basis points)

Westpac NZ Funding Sources: 2010 - 2013

Loan Market Pricing: NZ (1)

-

50

100

150

200

250

300

350

400

Jul-07 Jan-08 Jul-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13

Historical Average BBB Grade Margins (Indicative Levels)

5 year

3 year

Marg

in (

bp)

Loan Market Pricing: NZ (2)

Sources: RBNZ, Westpac

All-in Rate on 3-Year Loans for BBB rated New Zealand Corporates

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

BBB Margin (3yr) BBB All-in Rate (3 yr) 90-Day BKBM Bid OCR

Rate

(bp)

NZ Debt Market Volume

Sources: Westpac & Thomson Reuters

0

10

20

30

40

50

60

70

0

5,000

10,000

15,000

20,000

25,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

No. of

Loan D

eals

NZ Corporate and Local Govt Bonds US Corporate Bonds

NZ Loans Number of Loan Deals

Historical NZ Bond, USPP and NZ Syndicated Loan Market

NZ

$m

Flat Credit Growth for Banks

April 14

Offshore Banks – Project Finance Appetite

• European Banks downsized – stable (returning?)

• UK Banks downsized and exited Project Finance

• Investment Banks no lending unless Advisory roles

• Japanese – Active (no funding issues)

• Chinese Banks – targeting PPPs (Australia)

• Second Chinese banking licence sought

• Funds increasingly active

April 14

New Zealand Loan Market Overview

Volume

Pricing

Demand

Participants

• Syndicated loan volume up 6.7% from 2012, total deals flat.

• Bank demand for assets continues to increase.

• Loan margins trend down – lack of new deal flow;

competition amongst banks for assets.

• Competition for deposits flattening.

• Apart from Rabobank, European banks have left the NZ

corporate market.

• Some appetite for jumbo syndicated deals or large M&A and

Project Finance transactions.

• Asian banks continue to increase in the NZ market,

evidenced by the recent entry of ICBC, CIBC, Bank of India.

• We have also seen appetite from funds to take senior debt

exposures.

Infrastructure Financing in Australasia

Australia - Infrastructure Market Leader

• Australia is held up as the inventor of the infrastructure asset class

– Sydney Harbour Tunnel (1986), CityLink (1995)

– Privatisation of regulated utilities and airports (90’s and early 00’s)

– Social Infra PPPs in Schools, Hospitals, Prisons (early 00’s)

• Development of a wholesale infrastructure fund market

– Hastings established Utilities Trust of Australia in 1994

• Development of ASX listed infrastructure funds

– Transurban listed in 1996

– Hastings listed the Australian Infrastructure Fund in 1997

• Macquarie Bank and Babcock & Brown go global in the early / mid 00’s

– Every investment bank + others look to replicate the success

NZ Infrastructure Asset Class - Mixed

• Privatisation of regulated utilities, transport operators,

ports/airports (80’s and early 90’s)

– Poor public perception sets back further private capital opportunities

– Private investors in key assets/infrastructure run poorly and to fail

– Recovered through the 2000’s

• Stand alone project financing very limited

– Geothermal, oil & gas, Opuha dam

• Entry of some Infrastructure Funds into NZ - Forestry

– Growing awareness and stand alone asset classes (NZ Super / ACC)

• NZX listed infrastructure funds

– Infratil established 1994

Impact of the GFC

• Valuations fall

– Too much equity chasing too few deals + over leverage

• Listed infrastructure model fails

– Leverage on leverage. E.g Babcock’s

• Raising new institutional funds become challenging

• Large failures in the Australian tollroad sector

– Cross City, Lane Cove Tunnel, CLEM 7, Brisbane Airport Link

• Monoline Insurers fail

• M&A activity subdued

– Opportunities focused on new greenfield projects

• No long tenor (ie 20-30 year) financing solutions

NZ Capital Intentions Plan

New South Wales Queensland

Greenfield Greenfield

North West Rail - $3.0bn Q3 2014 QLD Rollingstock - $2.0bn, Q2 2014

Sydney Light Rail - $1.6bn Q4 2014 Toowoomba Bypass - $1.6bn, 2015

Northern Beaches Hosp - $400m Q4 2014 M&A

WestConnex - $11.5bn, 2017 CLEM 7 - $600m, Q4 2013

M&A QML - $3.0bn, Q4 2013

Port of Newcastle - $700m, Q2 2014 QCLNG Gas pipelines - $3.0bn, 2014

Cross City Tunnel - $400m, 2014? Qld Airport Link - $1.0bn, 2014

Pipeline

Victoria Western Australia

Pipeline

Greenfield Greenfield

East West Link - $3.0bn Q4 2014 Perth Stadium - $500m Q3 2014

Ravenhall Prison - $400m, Q4 2014 Perth Light Rail - $500m, 2015

M&A

Vic Schools PPP - $220m, Q4 2013

New Zealand

Greenfield

Transmission Gully - $1.1bn Q3 2014

NZ Prison - $250m, 2015

NZ Schools 2 - $200m, 2014

Puhoi to Wellsford - $1.0bn 2015

What is Project Finance

• Infrastructure

• Public Private Partnerships (Social & Economic); Toll roads; Ports

• Telecommunications

• Power and Utilities

• Power stations / Wind Farms; Gas Pipelines

What is Project Finance?

• Is the financing of an asset where the repayment of the financing is restricted to

the cashflow generated directly from that asset(s) and the security over its

asset(s).

Project Finance

Main Sectors

Growth Sectors

• Natural Resources

• Irrigation

• Renewable Energy

Advantages / Disadvantages of Project Finance

From a Customer’s Perspective

Advantages Disadvantages

Limited or non-recourse to the Borrower Tighter covenants and restrictions on distributions

Avoid inter-creditor issues between Projects

Typically higher pricing and higher transaction costs

Overcome restricted levels of corporate borrowing Long lead times

Potentially higher leverage available due to

structured nature

Increased reporting requirements.

Longer tenor

Through properly allocating risk, it allows a sponsor

to undertake a project that it may be willing to

underwrite independently.

Key Differences to Corporate Lending

Financial Analysis

Limited or non-recourse to the Sponsor / Parent

Financial analysis focused on project specific cash flows and debt profile as opposed to overall

position of a corporate entity

The quantum of debt available to the Project will depend on its construction and operations risk profile.

Debt sizing metrics are used to ensure that cashflow generated by the Project will allow for debt to be

amortised over its finite life (with a buffer or ‘tail’)

Covenants are typically stringent and allow for lock-up and cash sweep where the Project is not

performing during operations

Typical Risks Analysed

Risks

Construction Risk Risk that the project is

not executed correctly,

runs over time or

budget.

Operational Risk Risk that the project is

poorly operated post

construction.

Market Risk Risk that demand for

the end project is less

than forecasted.

Examples

Performance failure.

Equipment breakdowns.

Environmental Damage.

Weather Events.

Murrin Murrin mine

Design flaws and

breakdowns lead to cost

overruns of $600m.

Safety or environmental

issues.

Deteriorating assets.

Unplanned outages.

OK Tedi mine

Operator discharged

contaminated material into

river system. Cost BHP

over $400m in damages.

Substitution over time.

Change in consumer

behaviour.

Counterparty failure

Regulatory changes

Cross City Tunnel

Actual traffic flows

significantly less than

forecasted. Administrator

was appointed less than

2yrs after tunnel was

opened.

PPPs - Financing

Two Main Principles of Bankability

• PPPs are a cashflow financing:

– Not financing bricks and mortar

– ensure bank can sell a functioning and revenue producing asset

• No risk in the project company:

– Needs to be passed through to sub-contractors

– Or insured or mitigated through equity buffer

Prior to the GFC – Australian Market

• Patronage risk PPPs financed in bank market

• Social Infrastructure PPPs financed in bond market

– Unwrapped bonds or credit wrapped for volume

– 30 year financing tenors achieved

Project Bonds

Post the GFC – Australian Market

• Bank debt market only

• $3-4bn bank debt achieved for right Availability project

• No appetite for greenfield patronage risk PPPs

• 5 – 10 year financing tenors typical

Debt Sizing

• Based on a combination of:

– Market Revenue Risk – none, some, all

– Construction Risk – High, Medium, Low

– Operational Risk – High, Medium, Low

• Targeted minimum DSCR, max Gearing, min Tail

• Base Case conservative – refinance assumptions

PPP Gearing and Cashflows

• Cash flow certainty

– NZ ‘Outcomes’ focus creates difficulties for cashflow certainty

• Downside Abatement/Penalty scenario testing

• Focus on whole of life solution not highest usage forecast

• Gearing level 85 - 90% a symptom of Targeted Debt Service

Coverage

– Minimum/average DSCR 1.20 – 1.30x

Demand Risk – Difficult in PPPs

• Existing operations or greenfield risk

• Greenfields patronage risk – very low appetite

– Debt & Equity has been burnt consistently

• Rail/road Demand should be managed at System Level not Project

Level

• Introduction of Demand Risk will add significantly to whole of life cost

– NZ focus on operations risk

Case Study – New Zealand Schools PPP

• Involves the design, construction, finance, operation and maintenance of a new

690 pupil primary school and a 1,500 pupil secondary school on greenfield sites in

Hobsonville, Auckland

• Procured under a Public Private Partnership with the Crown with a capital cost of

c. NZ$85.0m

• Availability Based PPP i.e. no patronage risk

• c. 25 year Concession Period (offtake)

• Payment is subject to abatement/deductions related to performance

• At the end of the Concession Period, ownership of the schools will pass back to

the Crown

Project Summary

Case Study – New Zealand Schools PPP

Offtaker

Ministry of Education

Financier

Westpac

Equity

PIP Fund/Hawkins

D&C Contractor

Hawkins

FM Contractor

Programmed FM

Project SPV/Borrower

Learning Infrastructure

Partners

Project Agreement

Facility

Agreement

D&C Subcontract FM Subcontract

Subscription

Agreement

Project Structure and Key Documents

Demand for Public Private Partnerships - Australia

Public Private Partnerships

Cwlth NSW Vic Qld SA WA Tas ACT NT Total

Roads - 9 3 3 - - - - - 15

Rail & other 1 4 1 3 - - - - - 9

Health - 4 8 3 3 3 2 - - 23

Education 1 2 3 4 1 - - 3 - 14

Prisons - 1 6 - - 2 1 - 1 11

Water - 6 12 - 2 1 - - - 21

Emergency 2 - 1 - - - - - - 3

Courts - - 3 - 1 2 - - - 6

Communication - - 2 - - - - - - 2

Sports & other - 3 4 - - 1 - - 1 9

Other 5 2 2 1 - 1 - - - 11

Total 9 31 45 14 7 10 3 3 2 124

Recent Activity – City of Sydney

PPP’s Size Financial Close

Sydney Convention Centre $1.5bn Dec 2013

North West Rail [$3.0bn] [October 2014]

Northern Beaches Hospital [$600m] [November 2014]

Sydney Light Rail [$1.6bn] [December 2014]

F3/M2 [$2.6bn] [Mid-late 2014]

WestConnex [$10.0bn] Stages

Privatisations Size Financial Close

Sydney Desalination Plant $2.3bn May 2012

Port of Botany $5.0bn May 2013

Port of Newcastle [$1.0bn] May 2014

Outlook – Infrastructure Financing

NZ Market Issues

• Economic success impacts desire for PPPs

• Lack of Builders with balance sheet to wrap risk

• Offshore builders – ‘Jumbo’ projects only ?

• Insurance still an issue

• Mixed views from offshore capital to the NZ ‘Outcomes’ PPP model

• Financial and Legal Advisory pool is shallow

• Procurement teams vary greatly in understanding of PF & PPP

• Smaller Infrastructure projects

• Stop / Start procurement turns private capital off

• Long and slow pipeline development

• Risk of change in Government

NZ Outlook

• High needs – across multiple sectors

• More privatisations

– Subject to change in government

– Local Government balance sheet pressures

– New asset classes (Social Housing)

• Proceeds will be used to fund more infrastructure, particularly

transport

– Auckland Inner City Rail Loop

• Infrastructure debt/bond markets will develop

• Increase in Institutional Debt Funds

• Longer financing tenors 10+ years

• Banks provide risk mitigation. e.g Construction Bank L/Cs

NZ Longer term Outlook

• Acceptance of user pays systems – Auckland Motorway

• Mixed use of public and private capital – Bendigo Hospital

• Offshore investment into NZ builders/contractors

• Greater partnering of offshore contractors to provide risk wrap and

skills

• NIU embedding procurement discipline across agencies

• National infrastructure unit for local & regional councils?

• More widely embedded market skills (Legal, Financial, Banking,

Procurement)

• Bundling of projects into larger scale opportunities

Raynor McMahon, Director, Structured Loans, Westpac Institutional Bank - Private capital funding...

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