Editor's note: This article was updated on March 19.
Project finance officials are paying close attention to daily headlines as they feel their way through market turmoil and strive to move deals forward, despite headwinds caused by the Covid-19 crisis and oil price slump.
Governments and central banks have reached for extreme stimulus measures in recent weeks in efforts to contain the economic impact of the viral pandemic, while a dramatic shift of investors into risk-off mode has pushed Treasury yields to never-before-seen lows (PFR, 3/13).
Bankers say the impact on project finance deal making will depend on which market borrowers are attempting to tap, with bank market loans having the best chance of progressing, while debt in the institutional market will be harder to shift.
Term loan A
“The term loan A market is open,” says a senior project finance banker in New York. His firm has been continuing to pitch to project sponsors and credit approvals are still coming through for the time being, albeit slowly.
For instance, LightsourceBP was able to close senior debt and tax equity for its 199 MW Impact Solar project in Texas on March 12 (PFR, 3/19).
"A lot of times banks fix their base rates at the commitment stage," says an official at an infrastructure investor. "If you’ve already received a commitment, you’re able to move forward."
Looking ahead, however, "there are growing liquidity concerns in the bank and tax equity markets," notes a senior project finance attorney.
“We’ll see how it goes," says the project finance banker. "Every day seems a little bit fluid. Maybe next week the market shuts down. I don’t know.”
Competitive Power Ventures will be hoping the bank market stays open long enough to syndicate a $1 billion loan it launched last week for its $1,250 MW Three Rivers Energy Center gas-fired project in Illinois (PFR, 3/12).
Term loan B
There are also a couple of deals ready to be launched in the term loan B market, but observers say they may be delayed if possible.
A $200 million-plus loan for GenOn Energy’s 1,142 MW Bowline plant in New York’s Lower Hudson Valley was said to be in the works in January, with Jefferies acting as bookrunner.
More recently, Morgan Stanley started pre-marketing work on a $900 million term loan B to finance The Carlyle Group and EIG Global Energy Partners’ joint acquisition of the Patriot and Liberty projects in Pennsylvania from Panda Power Funds (PFR, 3/9).
But launching such deal into a market where U.S. leveraged loans are trading at 86 cents on the dollar, on average, as they were on March 19, is not for the fainthearted.
“It’s safe to say that no one will want to venture into the market unless they absolutely have to do so, e.g. because an acquisition is closing or an upcoming maturity is imminent and must be refinanced,” says a leveraged finance banker who specializes in power sector deals. “I would expect everyone else to delay and wait for markets to normalize.”
In the investment grade U.S. private placement market, investors are tied up with assessing the impact of the novel coronavirus on their prior investments.
“Our focus is close attention to the existing portfolio and assessing impacts of virus / capital markets / energy price,” writes a buy-side source, via email. “There is stuff to do this year, but if feels like the market has slowed dramatically.”
Latin American deals have also started to feel the impact of Covid-19. Delays in closings, difficulties justifying underwritings, and further scrutiny for sponsors and corporate offtakers are to be expected, says a project finance banker in New York.
A $170 million debt package for IEnova and Saavi Energia's 108 MW Energía Sierra Juárez II wind project in Mexico, for instance, was expected to close by mid-March but will be delayed, says a deal watcher in Mexico City (PFR, 3/3).
While several project finance officials seized on record-low Treasury yields and Federal Reserve rate cuts as an opportunity for sponsors to refinance or hedge to lock in rock-bottom rates, the immediate turbulence means that they may have to wait until things settle down to execute such strategies.
“I wouldn’t want to be syndicating a deal right now if I didn’t have to,” says the project finance banker. “I certainly wouldn’t want to be underwriting right now.”
Additional reporting by Carmen Arroyo.