Coronavirus outbreak puts brakes on project finance

Coronavirus outbreak puts brakes on project finance

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New mandates for project finance deals are expected to taper off in the wake of the coronavirus outbreak as lenders review their portfolio and prioritize providing short-term liquidity needs over long-term loans, sources told LatinFinance.

"In any macro situation, liquidity is very important to pay close attention to and get it right," said a banker in New York. "We've seen the playbook right now with companies with access to liquidity drawing down."

Project developers are getting money from revolving credit lines ahead of schedule and also looking into new lines of credit so they do not face a cash crunch down the line, the banker said.

For deals that are near financial close, however, brownfield projects will not likely feel much impact, but greenfield developments are being scrutinized more heavily.
"If it is a greenfield project, we have to clarify the effect on the supply chain. There have been a couple of projects that have had to declare force majeure as the supply of photovoltaic panels from China was interrupted. The downsizing at certain ports is also delaying the delivery of many non-essential equipment across the region," said another banker in New York.

That means delays for a good number of projects in the pipeline, he said, while banks review their portfolios, looking more to minimize losses than drum up new deals.

"The appetite for banks to syndicate deals and take on big tickets will be hampered for a while. The project finance market will likely have to slow down as banks digest the new status quo," the second banker said. "Some deals that were expected to launch now will likely have to wait until the third or fourth quarter."

For projects already in development, whether or not they reach financial close could ultimately boil down to geography, sector and credit quality, the first banker said.
"Certain deals will remain clear cut, while others will get more scrutiny as a result of this situation. There will also be sectors that may not necessarily suffer from the crisis. For example, power consumption could tend to increase as a result of more people staying home," he said.
Most projects are backed by guarantees, completion bonds and reserve accounts large enough to withstand the current downturn. The contracted cash flows in many infrastructure projects provide a better shield for developers than in other industries, although some companies with private-sector contracts could face uncertainty, he said.

But if the crisis lasts longer than expected and the liquidity squeeze spreads to more markets in the coming months, some project developers could be forced to declare force majeure, a third banker said.

"To declare force majeure, you've got to be very specific about your situation. Does this pandemic immediately lead to cost overruns? I'm not sure that's the case because there will be some other things that compensate for it," he said, adding that he spoke from experience.
If some banks pull away from providing new project finance loans as borrowers draw on existing credit lines, private placement deals could fill the gap and play a greater role in long-term financing for good projects, said another banker in New York.
"Private placements will continue to look at sensible and robust projects," he said.