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

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

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Raynor McMahon delivered the presentation at the 2014 NEW ZEALAND INFRASTRUCTURE SUMMIT. ...

Raynor McMahon delivered the presentation at the 2014 NEW ZEALAND INFRASTRUCTURE SUMMIT.

The New Zealand Infrastructure Summit brings you the most up to date infrastructure news combining case studies and key presentations, addressing developments in the some of the main infrastructure hubs, such as Auckland and Christchurch.

For more information about the event, please visit: http://www.informa.com.au/nzinfra14

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    Raynor McMahon, Director, Structured Loans, Westpac Institutional Bank - Private capital funding public infrastructure Raynor McMahon, Director, Structured Loans, Westpac Institutional Bank - Private capital funding public infrastructure Presentation Transcript

    • 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 Deposits Source: Westpac Indicative Margin Funding Costs Relative to OCR (basis points) Westpac NZ Funding Sources: 2010 - 2013
    • Loan Market Pricing: NZ (1) Page 4 - 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 Margin(bp)
    • Loan Market Pricing: NZ (2) Page 5 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 Page 6 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.ofLoanDeals 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 Page 7
    • 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 Page 8
    • New Zealand Loan Market Overview Page 9 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 Page 11
    • 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 Page 12
    • 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