ghp July 2015 | 33 industry insight Seven years on: 3 Ways Project Finance has Changed Since the Financial Crisis David Rose, Head of Advisory at Operis, outlines how the market has evolved. It’s been over seven years since the financial crisis reared and shook all aspects of global finance. Like many sectors, the project finance industry is still feeling the ramifications to this day. In the years since the crisis, international banks have relinquished their status as the de-facto source of funding for PPP projects, which created an opening for many alternative providers. But what are the other major shifts the project finance industry has experi- enced since the financial crisis? 1. Moving from an underwriting and syndicating model to club deals One of the most notable changes has been the change from a large scale underwriting and syndicat- ing model towards club deals. Before 2008, most major project finance deals were funded by leading investment banks who had the resources and balance sheet to underwrite the entirety of the needed debt and would then syndicate the loan by selling smaller participations to other parties. Bankers were confident in their ability to price risk and make a profit on parcelling out the loan. Obviously, the large amount of risk this put on the pri- mary lender has become far less attractive post-crisis, and difficult to perform under regulatory rules. Bring- ing a larger number of funders into deals minimises risk – so in recent years loans have been increasingly funded by larger clubs of banks with each lending a smaller amount of the total. Working with a large bank club can be challenging for sponsors and advisors on a deal as the due diligence effort is increased to answer more questions and satis- fy numerous credit processes and committees. 2. Unwrapping the bond market The decline in banks’ appetite for project finance assets and the downgrading of monoline insurance companies has seen the rise of an unwrapped bond market in the UK and continental Europe. The size of loans required for larger projects is not the only challenge to banks operating as before. The length of maturity for major infrastructure investments, for example, which can extend past 35 years, is also punishing. Regulation such as Basel III has made it far more capital intensive for banks to extend funds over such long tenors. This has led to increased pop- ularity for unwrapped bonds, where pension funds, asset managers, and insurers can get involved. The M8 motorway project was one such example of this. At the time (2014), it was the largest project to close under the Scottish Non-Profit Distributing model and involved the completion of an eight mile missing link between Glasgow and Edinburgh. The £350 million debt package for this project com- prised a bond from Allianz Global Investors and an EIB senior loan, making it the first UK roads project involving bond financing since the global financial crisis in 2008. This is a project where Operis provided model auditing services for the consortium in charge of the project, including a full tax and accounting review for both the bid and financial close stages of the project. 3. The rise of economic infrastructure Over the last five years, the types of deals being sought and funded have also changed. We have seen a trend from investment from ‘social’ investments in schools and hospitals to more economic infrastructure such as transportation or energy projects. This has been a noticeable movement in the UK and Europe, but can often mean very intricate and complicated deals. Road projects are massively disruptive to exist- ing infrastructure during construction and require long timescales to recoup costs and energy projects have to carefully factor the changing price of power. The rise in these more complicated projects and their associated complex funding structures puts more pressure on lenders to be able to interpret incredibly detailed project models incorporating multiple trends and variables.