Commentary

WSJ on What’s Hot and What’s Not in Infrastructure Investment

Keenan Skelly at the The Wall Street Journal‘s Private Equity Beat offers a post today on what’s hot and what’s not right now in the infrastructure investment market:

Out: Large deals. Investors say the number of banks that are willing to lend to infrastructure deals has declined. Where there used to be 40 banks active in this sector, there are now only 10 or 15. That means syndication has declined, increasing risk and ultimately leading to smaller transactions.

In: Parking meters. This is an example of a type of deal in which there is effective monopoly control, said Joe Seliga, a partner at law firm Mayer Brown LLP. The attractiveness of this type of asset can be seen in last year’s 75-year lease of Chicago’s parking meters to Morgan Stanley for an upfront payment of $1.2 billion to the city.

Out: Ports. Even though these might seem like a true monopoly, they aren’t, since they still have to compete with other ports. “Ports have proven to be the most vulnerable in this economy,” said Trace McCreary, managing director of North America Infrastructure for Barclays Capital. “Shipping traffic has fallen off the cliff. That’s not to say we wouldn’t consider financing a port transaction, but it would have to be appropriately structured, with significantly lower leverage than was seen in port deals over the last few years.”

In: “Availability payment” structures on monopolistic assets like roads. Here, the private sector finances the building of an asset, such as a toll road, then gets a certain guaranteed rate of return over time, through rent-like payments, so long as certain performance metrics are met. This structure was used in Florida’s recent $1.2 billion concession related to the development of toll lanes on I-595 with Spanish investment firm ACS Infrastructure Development Inc. The financing included $780 million from lenders BBVA, Societe Generale, Calyon, RBC, Lloyd’s, RBS and Fortis.

Out: Heavily leveraged deals. Lenders say that the days of 80% debt are most likely over, and that for the foreseeable future, putting up at least 40% equity will be the standard. This applies even to monopolies: “Even monopolistic assets will have variability in revenue, so you still need to assure yourself that it is properly leveraged,” said John Hastings, managing director of U.S. project and finance at RBC Capital Markets.

This seems fairly consistent with what I’ve heard recently at various infrastructure conferences, but it’s always worth cautioning that markets are ever-shifting, so consider this a snapshot in time, rather than a long-term outlook.

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Leonard Gilroy is Senior Managing Director of the Pension Integrity Project at Reason Foundation, a nonprofit think tank advancing free minds and free markets. The Pension Integrity Project assists policymakers and other stakeholders in designing, analyzing and implementing public sector pension reforms.

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