L'etre et le neant
The main concern, really, is the depth of the bank debt liquidity market which has been a significant historic source of flexible and relatively cost-effective funding and how one can tap alternative funding pockets should it prove necessary - institutional investor liquidity and project bonds are on the lips of everyone involved in the sector.
One cannot deny that as we speak, there is a bit of talking and speculation as to whether the new French government may be less willing to promote the PPP route. However, are there better ways to develop infrastructure than the PPP approach in the short or medium term? The fact is there are still many projects tendered, near BAFO stage, or in final negotiation stages. This is on the back of the closing of landmark large PPP projects in France and stadium, school/university, prisons projects being currently in the market.
Many banks also claim to be very busy with current French PPP transactions, especially under the still credit friendly Contrat de Partenariat scheme. Surely, the deal flow seems to naturally refocus on smaller to medium size transactions (from €50 to €500m) than the jumbo deals which marked 2010 and 2011, including among others the high-speed rail projects, some large road stretches or landmark building transactions. Therefore, the volume of deals and financing involved may not reach the heights of 2010 and 2011.
Yet the French PPP market is still keeping contractors, financial investors and debt providers busy. And some large road projects are in the initial procurement stages. Hence, one cannot deny that there is still some traction in the French PPP market despite the current economic downturn in Europe. Also, and perhaps the confirmation from the rating agencies of France's AAA rating will help, there seems to be a decent level of appetite for Contrat de Partenariat type transactions and for the Dailly tranches - provided the counterparty risk is acceptable to banks (creditworthiness of the public party paying, among others, the rent to the special purpose company).
The key to maintaining a strong PPP activity in France (to the broad definition of PPPs) is to indeed have a continuing willingness from the state and local authorities to use the PPP scheme combined with the availability of appropriate funding (tenors and risk appetite being the challenges in the current bank market).
There is no denying the funding of PPP projects is getting more difficult. However this still depends on the underlying risk profile of the transactions and several other elements which affect the ability to fund a project.
First, the recent failure to reach financial close on the A355 demonstrates the current difficulty to fund pure traffic risk-based infrastructure. One can argue that it is almost too much of a contrast to the golden age of motorways in 2005-07 in France when liquidity was flowing; debt leverages were high (90:10 or above when 60:40 or 70:30 has been seen recently) and pricings in the 100s bps for such deals.
But the fact is traffic-based risks do not seem to be the flavour of the month. The last motorway project closed in France was the A150 in early January, for a smaller debt amount and with a lot of efforts and creativity from the NGE-led consortium and its financial adviser to keep its banks in the deal and upon workable terms and conditions. One will argue that some isolated projects' inability to deliver the anticipated traffic have dented banks' appetite for such risk, other will defend the relatively valid view that the historic traffic on French toll roads has been pretty resilient to the economic downturn - let's not forget that lenders apply a significant cushion for the traffic estimate underlying the base case they lend against.
On the other side of the spectrum, Contrat de Partenariat or availability-based deals still attract liquidity in France albeit with much higher pricings - the days of 10-15bps for a Dailly tranche seem a vague memory. And there are some concerns for tenors over 25-30 years as Basel 3 constraints, for example, begin to affect banks’ risk acceptance criteria. But these deals still get closed and attract banks’ liquidity provided they are comfortable with the public entity's counterparty risk. The latter point can be a strong issue to overcome though.
Japanese and German banks still seem to be strong and have partly compensated the lower/more expensive bank debt liquidity available for French projects over the last couple of years but one can wonder whether this is enough to fund the forthcoming pipeline of French PPP deals.
All eyes are turned on the possibility to put together debt instruments capitalising on institutional investor liquidity and appetite for the still attractive alternative asset class that infrastructure represents. A bond revival is seen as the potential answer to compensate the decreasing bank funding available, but when do we see it happening in France as a sustainable pocket of project debt funding?
The French government and MaPPP have been working on the topic, especially from the Dailly angle and there are surely private initiatives to seek to pull such liquidity together. The question being how we address institutional investor "investment" constraints and create a debt instrument which is suitable to PPP projects. These include lending to a greenfield project, taking the construction, potentially the ramp up and the operation and maintenance risks, and offering long term tenors and decent pricings. Although without being too controversial, the latter may be a less important issue at the current stage, for newly launched project.
The other component to solve the complex equation of funding PPP projects in France may involve that the public sector, in its capacity of grantor, revisits some points in the underlying Contrat de Partenariat or Contrat de Concession (including the tender process rules), which may improve the lender's perception of the transaction risk profile and increase their appetite. But here again, this is a touchy topic which could take some time to think about and implement some changes.
Lastly, there may be ways to be a bit clever in terms of how we can bring some credit enhancement to French PPPs debt structures to decrease specific risk which lenders may struggle with and attract pockets of debt liquidity.
Professionals in infrastructure have been quite innovative and pragmatic over the last decades in finding solutions to the various adverse situations occurring and affecting liquidity. It is true though the current situation seems particularly difficult and has lasted for quite a while. But fund providers, starting with lenders, need to remember that infrastructure assets fundamentally still offer a relatively well balanced if not attractive risk/return profile.
The deal flow, especially for Contrat de Partenariat seemed relatively strong with, for example, the second prison programmes, some schools and university projects, and some stadiums among recent projects being tendered. However, post Presidential elections, some of these projects have been questioned, reassessed and postponed. Information suggests many of these deals may still go ahead, which would be positive news.
The MaPPP has an official list of projects which offers a certain level of visibility as to what is forthcoming and some landmark transactions which are being processed, for example, the Toulouse University 2 - Le Mirail project, and Contournement Nimes Montpellier, which closed at the end of June. But in fairness cannot be considered as new deal flow versus the "second wave" of PPPs which are more in the €50m - €500m range if one dared classify them from total project cost standpoint. The local authorities certainly need these projects to develop and be implemented as part of improving their infrastructure. So the need for them is there.
Toll road projects are also in the pipeline with, among them, two large stretches such as the A45 or A831. Whether the A355 recent turnaround affects these projects remains to be seen as the jury is still out.
So the scale of PPPs may not be as high as what we have observed in 2010 and 2011 (probably one exceptional year). There is a bit of a question mark as the new government reassesses to a certain extent the PPP programme, but the French market can still be considered as active.