As Euro-area interest rates continue to flatline, institutional investors are increasingly turning to infrastructure in order to benefit from its long-term reliable fixed income returns, diversification and inflationary protection safeguards.1 As a result, infrastructure funds are seeing record inflows, having accumulated USD85 billion in 2018, up USD10 billion from 2017. 2 Experts are largely bullish about Europe’s prospects over the next few years, especially as more governments are looking to strengthen their infrastructure credentials by investing into various projects aimed at improving digital/telecoms; transportation and sustainability.
It is also likely that project finance teams and large institutional investors will play a crucial role in helping to fund UK infrastructure development moving forward.
EU regulations and the drive for sustainability
Sustainability is now at the core of the European policy debate, as governments look to demonstrate their commitment to international agreements such as COP 25 and the UN’s Sustainable Development Goals (SDGs). Simultaneously, there is also much greater private sector funding going into green projects. This is being accelerated by EU regulation such as the incoming Action Plan on Sustainable Finance – adopted in 2018 – which will require investors to publish details about how they integrate sustainability into their businesses.
The rules will also create a taxonomy enabling organisations to monitor their ESG progress against a measurable benchmark. At a local level, regulators in the UK and France have asked institutional investors to disclose information about their ESG policies to clients.3
The UK – in particular – is taking a robust position on climate change financial risks. Having warned that climate change is a systemic risk, the Bank of England is now subjecting banks (plus insurers) to rigorous climate change stress tests analysing how they would cope with different variables including extreme weather events or a sudden fire sale of brown assets.4
However, regulations elsewhere could have unintended consequences for green project finance. For example, several leading financial institutions have cautioned that Basel III – which obliges banks to hold more capital against their project finance initiatives – could deter banks from funding green programmes altogether. 5 In response, regulators have been advised to consider lowering the capital requirements for financing sustainable projects (i.e. solar/wind), an idea which the European Commission has said it is open to. 6
Meeting UK infrastructure requirements post-Brexit
Brexit is going to usher in a number of changes to the UK infrastructure ecosystem. Having contributed to around one third of the UK’s infrastructure funding in 2015, the European Investment Bank (EIB) and the European Fund for Strategic Investments (EFSI) will no longer be supplying this financial support post-Brexit.7 At the same time, the UK government has made ambitious pledges to promote domestic growth through high-profile infrastructure projects such as HS2 and free ports. It is also likely that project finance teams and large institutional investors will play a crucial role in helping to fund UK infrastructure development moving forward, explains Dale.
Banks prioritise sustainability
Nicola Dale, Business Development Manager, Europe, at HSBC Issuer Services, says HSBC has been involved in a number of green project finance and infrastructure programmes. “HSBC is working on a number of deals which fit into the sustainability bracket and the wider EU objective to become a net zero carbon emitter by 2050. These have included project finance initiatives promoting renewable energy sources including offshore wind farms, grid interconnectors, energy-to-waste facilities, battery storage technologies, and electronic vehicle charging. Elsewhere, we are working hard to deliver energy efficiencies by providing financing to companies that are developing smart meters,” she continues.
|HSBC acted as joint global coordinator on an IPO for a company specialising in essential energy infrastructure assets. The client raised in excess of GBP300 million in primary proceeds from the IPO and a further GBP70 million from the secondary component. The proceeds will be used to support future company growth and to finance the rollout of smart meters in the UK. The IPO was a landmark transaction as this was the first time which HSBC had acted as global coordinator for this particular company. It also demonstrated to clients the added-value of benefiting from an end-to-end solution with components from HSBC’s Equity Capital Markets, Financing and Issuer Services capabilities.|
Digitalisation: A new frontier for project finance
It is not just sustainability that is likely to drive project finance moving forward – so too will digital transformation. “One of the areas we are focusing on is the growth of the digital economy,” says Dale. If smart technologies (e.g. internet of things) are to take off, they need to be underpinned by robust digital infrastructure. This could be facilitated by the roll out of 5G technologies and nationwide full fibre coverage, something the UK government estimates could cost up to GBP6.8 billion.8 In addition, huge amounts of financing will also be required to fund the construction of data centres to support this digital economy.
Consequentially, banks will have an integral role in helping countries meet their full digital potential.
Leveraging the role of trustee and agency operators
HSBC is an industry leader in supporting project and export finance initiatives. The bank’s Issuer Services unit specialises in providing onshore and offshore agency and trustee services. “One of the primary benefits of our Issuer Services business is that it allows us to provide a single bank solution for customers, which is much more operationally efficient. Moreover, our team is staffed and operated by individuals who have an exceptionally deep knowledge and understanding of the market,” says Dale. Issuers and lenders can also gain additional benefits in the complex value chain of the transaction by appointing a trustee or agent to handle reports, updates and coordinate the chain of communications with the multiple parties involved.
One of the primary benefits of our Issuer Services business is that it allows us to provide a single bank solution for customers, which is much more operationally efficient.
|HSBC Issuer Services has an excellent track record of supporting sustainability projects. It was appointed Project Account Bank to provide controlled collection accounts for the remittance of monies to contractors involved in the construction of a housing development project at the Queen Elizabeth Olympic Park in London. As part of this, the developers are building 302 zero carbon homes. The housing provider had specific account requirements. HSBC customised its offering to meet the client’s needs under strict deadlines.|
|Escrows are normally used in M&A transactions, but they are being utilised more widely now by organisations which are looking to green their enterprises, says Dale. Dale adds a number of the leading North Sea oil producers are currently using escrows during the decommissioning process of their legacy facilities and infrastructure. Escrows can help support efficient risk management during deals (i.e. by reducing timing risk and mitigating counterparty risk) allowing clients to focus more on the overriding terms of the transaction.|
United States: Renewables dominate project finance
Renewables are playing an increasingly pivotal role in the U.S. project finance market, something that has been facilitated by growing client demand. Reports, for example, show renewable energy outpaced coal in April 2019 by providing 23 per cent of US power generation that month, compared to coal’s share of 20 per cent.9 Simultaneously, wind and solar accounted for half of all U.S. renewable energy generation in the first half of 2019, surpassing hydroelectricity. 10 This trend has been facilitated by declining costs, improved battery storage and the rising capacity of renewable energy sources themselves, according to Deloitte.11
Ronald DeSorbo, Business Development Manager, U.S. at HSBC Issuer Services, concurs that project finance teams at the bank are spending more of their time on transactions linked to renewables. “There is an increasing number of deals happening in the renewables space,” he adds. Amongst the drivers behind this uptick, DeSorbo points to the declining cost of technology and the value from tax equity benefits. In addition, the sustainability goals of large tech US corporates such as Microsoft, Amazon, Facebook and in other sectors are increasingly counterparties to offtake contracts, rather than using traditional utilities. Finally, state-level renewables targets and incentives are having a net positive impact on institutional investment into renewables.
“HSBC Issuer Services – when supporting these transactions – performs several roles including facility and administrative agency services for the short-term financing, loan support, as well as administration solutions such as acting as account bank for project accounts and collateral agent for the accounts and other assets that are being pledged on the financing side. On longer-term schemes, including refinancings of short-term financing we can act as a trustee too,” comments DeSorbo.
In addition, the sustainability goals of large tech U.S. corporates such as Microsoft, Amazon, Facebook and in other sectors are increasingly counterparties to offtake contracts, rather than using traditional utilities.
|HSBC Issuer Services recently provided support to Cubico Sustainable Investments, a leading renewable energy infrastructure company across Europe and the Americas. HSBC was appointed as ‘left lead’ to finance the construction of a circa USD400 million, 377MW portfolio of the three photovoltaic solar projects in South Carolina and Texas, subject to a master common terms agreement. HSBC was selected as the administrative agent, collateral agent and depositary agent. HSBC's Issuer Services team was able to accommodate tight closing timeframes and necessary amendments. HSBC Issuer Services continues to be part of the bank's full service solution for Cubico.|
To find out more about HSBC Issuer Services:
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1 Preqin – 2019 Preqin Global Infrastructure Report
2 Financial Times (January 19, 2019) Infrastructure funds set for a boom year after a record 2018
3 IPE (September 30, 2019) UK’s new ESG pension rules are just the first step: PLSA
4 Financial Times (December 18, 2019) Bank of England to set up tough climate stress tests
5 S&P Global (July 10, 2019) Banks see climate change as a full blown financial risk, says SocGen deputy CEO
6 S&P Global (July 10, 2019) Banks see climate change as a full blown financial risk, says SocGen deputy CEO 7 London School of Economics – What Brexit means for the UK’s public infrastructure
8 Telecoms (November 27, 2018) UK gov reserves GBP6.8 billion to realise 5G dream by 2027
9 Deloitte – 2020 renewable energy industry outlook
10 Deloitte – 2020 renewable energy industry outlook
11 Deloitte – 2020 renewable energy industry outlook