European roads competition set to grow
EU
InfrastructureMarket UpdateThe Dutch and German markets are the driving force of Europe's road PPP pipeline. And, while fiercely competitive, both countries are almost certain to see new entrants given the size and scale of some of the tenders set to launch this year. There is also continued access to cheap liquidity, despite unease over aggressive debt terms
The dominance of a few core markets and the continuing cheap debt environment are some of the key trends of the roads sector in 2016, panellists concluded at inspiratia's European roads breakfast briefing, hosted by Osborne Clarke on 26 January.
Each with three roads currently in procurement, the Dutch and German pipelines are the bread and butter of the road PPP market. German infrastructure will keep developers busy for several years to come, having unveiled in 2015 a plan to procure 10 new road projects. And Dutch authorities intend to churn out a new procurement each quarter, with capex figures set to rise to the €1 billion (£771m US$1.09bn) range as further deals emerge in the second quarter of 2016.
The market remains flush with liquidity, with competition for deals driving debt pricing to all-in levels of 250bp. In the case of the A94 in Germany, which reached financial close earlier in January, pricing was secured at 110-125bp + Euribor [Figure 1].
Consequently, some project finance banks are no longer competitive and the institutional lenders, who were attracted by higher returns just a few years ago, are now on the retreat. While institutionals have proved more vibrant in some markets, such as Ireland, pricing has nevertheless seen a steep decline – from 350 + Euribor on the N17/N18 motorway in 2014, to the low to mid-100bps on recent deals.
Beyond core markets, there are other potential opportunities for the taking, perhaps offering higher returns. "There's pockets of activity and you really just need to pick up on these pockets," said panellist Andrew Normington, partner at Osborne Clarke.
The Slovakian adventure
Looking back, Slovakia's D4/R7 Expressway was certainly the most talked about road PPP deal of 2015. The opening of financial bids at the tail end of last year stunned the market, revealing a €600 million (£462m US$655m) gap between the winning €997 million (£758m US$1.08bn) bid and the most expensive proposal.
The Cintra-Macquarie-Porr consortium is expected to be awarded the contract any day now. Its likely success puts Cintra and Macquarie at the top of tree on European road PPPs successfully bid on by deal value for the Q1 2014-Q4 2015 period [See Figure 2].
"We're comfortable with the pricing. Obviously when the prices of the competitors were unveiled we were a little bit surprised […] This was our first tender in that kind of market," said Federico Gredilla, commercial director at Cintra, during the event on Tuesday [26 January].
The EIB and EBRD-backed deal had attracted a flurry of interest from international investors and lenders. But with Slovakia's elections just around the corner, the political risk element and the ambitious scheduled were always talking points.
"Partly it was too quick, perhaps, and that might explain some of the differential in the pricing," said panellist Paul Nash, a partner at DIF. "It was quite challenging to do a full design process in four months and do all the due diligence that was necessary. Had it been a slower process, I suspect final bids would have been closer."
Figure 2: Sponsor bid success rate, Q1 2014 - Present
Source: inspiratia | infrastructure
Netherlands
Looking at the year ahead, the N18, A6 Almere and A1/A27 motorway PPPs are all in procurement in the Dutch market, as well as other PPPs outside the road sector. These deals are all in the €200 million (£154m US$218m) range, but several €1 billion (£771m US$1.09bn) projects are also in the pipeline - the first of these expected to be the Blankenburg PPP anticipated in Q2. This will be followed by the A13/A16/A20 Rotterdam project in the summer.
"There is a lot of interest in the Dutch market," said Rob Peters, senior financial advisor at the Rijkswaterstaat. "There are eight or nine equity funds available for three or four consortia now, so there is huge pressure. Debt is also readily available and that drives margins down."
Yet despite interest from equity and debt providers, the market is still dominated by local developers, with only Hochtief of the international groups having a local office.
With the advent of higher capex projects, however, the market landscape could be in for a change. This is partly owed to the fact that local constructors could lack capacity and with two large tunnel DBFM projects looming in the distance, they also lack experience within this specific sector, said Peters.
"There's a need maybe and also a place maybe for foreign contractors to enter our market," said Peters.
Germany
Next door in Germany, there is a €5 billion (£3.8bn US$5.4bn) pipeline of availability roads. Until recently, there were four projects concurrently in procurement.
"They've got a good pipeline coming along, and the deal sizes are quite nice," said Nash (DIF), whose company is currently bidding on the A6 and the A7. "They don't use a lot of milestone payments, so you end up with a decent equity cheque."
The A94, which reached financial close on 19 January, featured a successful new market entrant – Eiffage, and others are bound to follow. On the back of Cintra's success in Slovakia, the Spanish developer is mooted to consider upcoming German deals, an uneasy prospect for established players. On the D4, Cintra is partnered with Austrian constructor Porr, and this relationship could provide a way in to the Germany market.
"It's a fiercely competitive market. Obviously we're going to look into it, but it's very difficult to get something there if you're not well established. The language barrier is important," said Gredilla (Cintra).
With the global credit crisis now a distant memory, pricing on European PPPs has reached lower and lower margins. This is owed to both macroeconomic factors such as quantitative easing and market developments such as the emergence of more institutional lenders – although, for them, the prospect of infrastructure debt may no longer be as attractive as it once was.
"You now look at returns of about 2.5% all in, which clearly for institutional investors is not a play where they want to be," said Michiel Engelaar, senior loan officer at the EIB.
"It's not just the pricing that's aggressive," said Engelaar, whose team signed 14 infrastructure and renewables deals in France, Benelux, Ireland and the UK last year. "I think the terms in general have become very aggressive. We see more and more now introductions of DSRFs in the structure; we see tails which are almost disappearing across deals."
Another concern, he said, is that structures are founded on the confidence that developers won't run into trouble during construction, whereas balance sheets aren't as strong as they once were.
But as the number of lenders willing to offer increasingly aggressive terms dwindles, market sources are noticing some project finance players pulling back since the latter part of 2015.
"It's a bit variable. Some of the banks recently have raised their margins, but at the same time others have lowered them. The floor might be bottoming out, but there's no shortage of liquidity," said Nash (DIF).
Looking for opportunities
Beyond the core markets, other corners of Europe may also the odd project in 2016. At the moment, the first of these seems to be the R4 in the Czech Republic. Norwegian authorities are also developing a pipeline, although they are still determining the right balance of private capital.
And whereas UK procurement activity has generally run dry, there may be a few opportunities in 2016, including potentially the A14, the Silvertown tunnel and the A465 in Wales.
"We always keep an eye on the UK and there's a couple of interesting projects coming out here," said Normington (Osborne Clarke).
"There's not going to be too many new motorways in the UK. There are widening projects, there are bypasses, there's crossings. One of the more interesting aspects which we can probably look to, which might well replicate itself across Europe, is smart motorways."
A number of pilot structures are under the way along the M1 and the M4, he said, and a further 10 projects in the planning stages may offer an ample opportunity for PPP deals over the next few years.
Aside from greenfield opportunities, there is still plenty of activity on the secondary market, as assets mature in the UK, France, Germany and the Netherlands. Portugal and Spain have recently been the centre of attention, having concluded a number of PPP deals in previous years.
"Those countries have been a bit locked up for a while because of the economic situation. That's improved and most of the equity funds that do secondaries are back in those countries now," said Nash (DIF).
"There was a brief period of probably about six months when you could pick up assets at a nice return in Spain - now pricing is pretty much the same as it is in the rest of Europe."
Panellists:
- Andrew Normington, Partner, Osborne Clarke
- Paul Nash, Partner, DIF
- Michiel Engelaar, Senior Loan Officer, EIB
- Federico Gredilla, Commercial Director, Cintra
- Rob Peters, Senior Financial Advisor, Rijkswaterstaat, Dutch Ministry of Infrastructure and the Environment
Partner: Osborne Clarke
Date: Tuesday, 26 January, 2016
