Project bond issuance to remain low in the coming year

03 April 2014

Bonds accounted for just 10 per cent of project financing in 2013

Project bond issuance is expected to remain low during the coming year, bankers said at the Project Bonds in Mena conference on 2 April, which was organised by US law firm Latham & Watkins.

Mark Wells, a fixed-income managing director at French bank BNP Paribas, and Reena Sachdev, director of structured bonds at UK bank HSBC, said they hope to see one or two project bond issues in the next 12 to 18 months.

Commenting on the sukuk (Islamic bond) market, Harj Rai, a partner at Latham & Watkins, added: “I don’t think we’re going to see a project sukuk in the next 12 months. After Satorp [Saudi Aramco Total Refining and Petrochemical Company] and Sadara [Chemical Company] the wait is for another sizeable project in Saudi Arabia to be at the stage where they can come to market.”

While sufficient funding will be needed in the next decade to finance infrastructure projects, project bonds are not as easily executable as loans. In addition, loan pricing has dropped significantly over the past year, making issuing a bond more expensive for companies.

As a result, project bonds accounted for just 10 per cent of project financing last year.

But that could change as international banks are less able to lend among regulatory changes that require them to hold more capital in their reserves. Combined with an environment where global investors increasingly seek out high-yield securities with long tenors, as well as gain a better understanding of risk associated with regional projects, that could lead to a rise in bond issuance.

“Construction risk has been overplayed and investors are [now] understanding that risk better – it’s a matter of pricing for it to an extent,” said Sachdev. “Provided the construction risk is mitigated and reflected in the rating there will not be an issue per se. You can look at credit enhancement to cover off completion risk.”

Matthew Nathan, Mena project finance head of oil, gas and petrochemicals at HSBC, added: “Banks will continue to be there, but in the region there will be more a push from developers and banks to establish a project bond play.”

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