The centre cannot hold
David Cameron recently said he believes we are not even halfway through the euro debt crisis. Do you agree?
Following recent years and events the whole investment sector has an issue with trust. As the capital market investors are starting to see Euro state bonds’ varying levels of credit risk reducing their appetite to lend and also banks are struggling with a severely impaired inter-bank market, we now have Basel III threatening to stop many banks to lend to the public sector in general. And banks that are failing again.
Ultimately I think the whole market is in a changing mood again. Infrastructure is a long-term lending business, we have to make up our minds as to whether the pricing we are offering is at a fair market level. Banks cannot fund themselves on 30-year deposits anymore.
Thankfully Nord LB is in a comfortable position.
Have you come up with any funding solutions to deal with these challenges?
For some projects, yes. We can fund ourselves via the Pfandbrief market which is quite strong in Germany and still affordable. The Pfandbrief market is the German version of a covered bond so we look at lots of debt assets that have securities. The mortgage market, for example. If we are issuing a bond for 60% of €100m in mortgages with a loan-to-value of 60%, the investor knows there is at least 140% behind this.
Does this work on PPPs outside Germany?
On the French ones yes, because with the Cession Dailly they have certain indirect guarantees from the state. They are trying to install similar things in other countries. The UK, no, because they transfer all the risks to the private side so we can’t.
At this stage we haven’t got a long-term funding solution, there is not enough trust in the market. There will not be a big bang solution. We are currently working on a solution on a deal-by-deal basis, and providing investors with such good products and services that they start to trust us, and the market, and get something more routine.
So are brand and reputation becoming more important for banks in Europe?
I really think so. We provided debt to PFI projects in the UK at the height of the crisis, two or three months after Lehman Brothers closed. We stick to our word on risk profile and do our best to remain reliable. Ultimately, the last five basis points cannot be worth much more for a senior lender than the trust that the bank will still be there when it comes to signature time. This reliability will become more and more important to investors and sponsors when they continue to put their money at the tendering stake.
Have you found a change from European governments on the guarantees they are looking for? With France, and the big deals of 2011 for example?
Although I think it is only natural to see nationalism emerge and the name of a French bank in front of a French authority, rather than a German bank they have never heard of, I do not think that this is helpful to deliver best value to authorities nor sponsors. However I don’t see a lot of bigger changes, bid-bonds I put down to local authorities’ preference. Again, understandable but not helpful.
What about the role of the Japanese banks – have you seen an impact on pricing?
They keep the pricing low. We can hold the same terms but I don’t think it’s necessarily a good thing. The French banks are a fair amount above those prices which is why the Japanese banks are sweeping the market. I don’t have a problem with the pricing per se but if I look at a fair price for a 25-year debt, that is a guess. If you look at the bond markets, PPPs with French risks are priced at better or below French bonds. One is very liquid and capitalistic and the other is a lending business. I can see they are aggressive and have market share to win.
In terms of market share, how are you distinguishing between markets in Europe at the moment?
We would view Germany and the UK as our core markets and we have offices in both and have been active there for more than 10 years. Apart from that we are looking at Benelux and France. We would look at Austria on an individual basis, Switzerland and Poland.
What are your thoughts on Poland as a market?
Oh god – so young! I spoke to some bankers, advisers and some public sector people at a conference last year. I can see they are experimenting and that they are trying to get things right in the light of tendering laws and Maastricht criteria. Their PPP concept derives from the maximum transfer of risk to private rather than concentration on value for money. Also, their fear is the consolidation of debt on the public sector side.
There seems to be a lot of pipeline emerging at local level.
Poland has got very localised PPP systems. We are on one project now, a waste PPP in Poznan. If it weren’t for the client we probably wouldn’t be there because it’s experimental, and there’s a lot of work and a lot of trips to Poznan and Warsaw. All this in the light of five bidders remaining in the process.
I also had a look at a hospital project in the south of Poland that had volume risk, regulatory risk and risks that I would never have expected. They are taking real risks. We declined this project.
On the social housing side the public sector will look to offload volume risk, possibly tenancy risk as well. Same as the roads, they try to sell as toll roads and concessions with a shadow toll but that is not flying anymore – you can see it on the French A355.
But does it help to get in early into a project or pipeline and steer the terms and risk allocation?
I think they are happy to listen to reasonable arguments. But on the other side they still want a very good deal. We could always find a solution but Poland hasn’t got the same rating as France or the UK or Germany.
So how does working on the Poznan project compare to the Paris high court that closed in two months from preferred bidder last year during the crisis?
What the French do is have a lot in place at BAFO stage so it is just a final sprint to financial close. However, it was still very challenging to get to a close, I have to say. Not all has been negotiated. A few more weeks of sleep would have been good afterwards.
What would you like to see change in the French procurement process?
On the continent it is quite en vogue to have fully committed term sheets at BAFO and then held for three months. This is giving the market a real pain such that I just don’t do it. I hold for a week, maybe two. Even on a trust basis I hold for six to eight weeks. We have to do a whole due diligence at BAFO and only leave residuals so that’s a lot of work down the drain for the losing bidders. I think that is kind of unnecessary especially now as there are not a lot of us.
What will be the long-term effect of Dexia leaving the market?
The banks that are leaving the market are leaving for a particular reason. Pre-crisis it was always the same banks underbidding. We haven’t had a problem with our portfolio dragging us down as we wouldn’t go below a certain margin in 2006/2007 and we are still taking care of quoting what we believe we can deliver.
A lot of municipalities will have to look elsewhere for funding, though.
There has been a lot of discussion on institutional investment in the UK – how do attitudes on the continent differ?
An average pension fund team with five experts has to look at 200 or 300 projects a year – never! They could spend a few weeks on one thing and then invest half a billion. On construction risk, the public sector must give in.
And explaining the tender process to a lot of these investment managers means teaching them my language. We need to work together to make a product.
