Skip to content
Published
26 April 2023
Read time
6 minutes

Project finance meets the proliferation challenge

3 colleagues working in a room next to the window discussing with devices and calculator on the desk

Smaller deals are becoming more widespread in the current project finance era, impacted by a focus on ESG. While there are fewer very large prestige projects, the increasing number of deals, alongside geopolitical shifts, present opportunities across the board.

Project finance is facing huge reversals in some of the most important macro themes that have driven the industry for decades. For example, in many types of project finance – such as energy production – instead of developing larger and larger prestige projects, the prioritisation of ESG-led deals has resulted in more but smaller deals.

In many ways this spreading of investment helps sponsors and investors diversify portfolio risk, but it adds complexity and cost by requiring more work to put the same amount of capital to work across more projects. It also adds challenges from an administrative and regulatory perspective, with the need for partners such as collateral agents to be able to support companies working on a broad portfolio of deals that encompasses multiple partners across multiple deals.

This proliferation helps to explain the geographical diversification of industry players. Old rules, with certain jurisdictions dominated by investors of a certain country and / or type, are breaking down. China’s increased global ambition adds complexity and texture to these trends, with the belt and road strategy resulting in Chinese capital competing in areas that western investors traditionally dominated. Some investors have tried to engage when China has entered new markets, with the aim of building new consortia and partnerships, but progress has been slow. The Chinese companies still, in general, preferring unilateralist project construction and finance strategies.

This lack of Sino-European engagement has led to an increasing market share of Chinese participants in the European market and, due to their self-confident brand profile, they are playing a decisive role. Chinese banks and construction companies, alongside Chinese investors, developers, manufacturers and even Chinese utilities have now been active in European markets for a long time. This Chinese expansion threatens to outpace western European banks and investors - and even lead to them being pushed out of certain sectors altogether. In response, these European and other international investors and sponsors have undergone a marked exploration of new countries. For example, Spanish companies have been noticeably growing their presence in Africa and have been using their expertise in renewables to develop their relationships with governments and regulators on the continent.

However, while there are some outliers in Europe seeking new project finance, there are many players who have been slow to respond. The European public sector – a crucial catalyst for international project finance expansion – has been generally slow to co-ordinate a coherent strategy for international engagement with new markets. Governments, perhaps preoccupied with a myriad of other challenges, have let the longer-term vision that underpins project finance fall to the side.

“Some European companies and banks have sought to bypass traditional governmental challenges altogether, by building international consortia that, crucially, aim to bring in multi-lateral development banks alongside the private capital to lower total cost and risk.”

Alan Ross, Commercial Director at TMF Group

It has been left to the private sector to take the initiative. German and French banks are making progressive steps but without the catalytic impact from governments the effectiveness of their ambition has been reduced. Meanwhile Japanese banks continue to partner with European entities – providing valuable liquidity to syndicates – but remain hesitant to lead.

“Perhaps the region that will see the multiple forces driving proliferation play out in the starkest way will be Latin America. However, this forecast must be accompanied by a strong caveat: while the region appears set for a huge wave of smaller projects backed by sponsors and financiers from all around the world, creating the opportunities for new private sector consortia that pulls in national and supra-national organisations, there is still huge uncertainty.”

Karla Fernandes Managing Director at TMF Group Brazil

In Brazil, the return of President Lula brings huge optimism about new opportunities, but it is tempered by the caution of the macro-economic stability of people investing into the country for the middle- and long-term. There is a huge list of projects to be done and appetite from North America, Europe and Asia (not least China) appears strong, but there are still huge questions to be answered before deal flow and capital flows commence. Possibly the biggest question is what role will the countries’ state development bank, BNDES, play in the development of infrastructure projects? The new president of the state bank has signalled a desire to ramp up the level of disbursements to 2% of GDP. Private sector financiers fear that will ‘crowd out’ both bank loans and local capital market finance, as the BNDES returns to a dominant and subsidised role in the industry. Others think that political and fiscal realities will present a wholesale return to public financing of projects in Brazil and a blended approach will not only be the most practical but also optimal approach.

Another big question centres on the BRICS bank (now known as the NDB). If that scales up, how will it engage with the private sector in these countries and what will be its appetite for capital and risk?

However, while Brazil is the biggest market in Latin America, it is not going to be the only attractive market in the region. Mexico is seeing strong FDI flows from Asia and the US as the nearshoring trend builds traction, and that will see a demand for new Mexican projects across a wide number of sectors. Oil and gas, and renewables, provide a huge opportunity depending on the results of the presidential election in July next year. Chile, Colombia and Peru also have near term capacity and needs, and Argentina is the ultimate project finance mirage.

It’s potentially a very exciting era for project finance but a challenging one for participants planning to act at scale. Instead, the challenge will be to enjoy the benefits of risk diversification as many segments proliferate while still being able to deploy and manage capital efficiently. At TMF Group we believe that new industry partnerships, new forms of knowledge sharing and new multilateral working strategies will be vital in successfully meeting this significant challenge.

Project Finance

TMF Group’s global capital markets practice offers a range of administrativeagencyissuer/SPV and trustee services, across industries and clients. Our unique footprint ensures we can provide clients and transaction parties with real time assistance from our local experts. We have substantial experience helping clients with new and refinanced securities, syndicated loans, secured transactions and multi-jurisdictional transactions. Make an enquiry.

Securitisation and structured finance
Monitoring agents and debt negotiations

In the current global economic climate monitoring agents (MAs), or ‘watchdogs’ are busier than ever. Our expert explains what they are, what they do, and why they are deemed beneficial by negotiating parties.

Explore Topic
Financial charts showing growing revenue
Securitisation and structured finance
Private capital: developing project financing capacity beyond the DFIs

Capital Markets | Project finance

Explore Topic