PF Archive

The fear factor

19 11 2008

Infrastructure assets have enjoyed increasingly positive press on either side of the credit crunch because of their presumed immunity to the economic cycle and the hope for a wave of government spending in coming years. However, the sector shares in many of the crunch's effects, in stresses such as an increased cost of debt, sponsor and lender illiquidity, deleveraging, and a more conservative approach to deal-making. After the first round of the crisis, in the last quarter of 2007, the sector looked vulnerable to a number of concerns; notably widening margins, the possible weakness in the construction sector, and a reduced availability of long-term debt. The 2008 crisis has brought a larger number of more specific risks and weaknesses to the fore. Maura Goldstein, a partner in Baker Botts' global projects group, says that "The immediate reluctance on the part of debt providers to do deals is driven by fear over the lack of liquidity in bank funding markets. In this climate, it will be difficult to get even good deals done. Once this crisis settles down, then participants will still have the recession to contend with." Infrastructure lenders in the US, and to a lesser extent in Canada, have effectively shut up shop until at least the first quarter of 2009, and one banker familiar with the sector believes that even that timeframe is ambitious; "We need to keep a hand in the market, but we aren't looking to close any deals for at least a few more months, maybe...