19 September 2012

FN: Infrastructure turns to capital markets as banks cut lending

Ratings agency Standard & Poor's expects capital market financing for US infrastructure projects to double in the next two years, as banks cut back on lending due to regulatory requirements to hold more capital.

Bank lending has historically provided the majority of funding for large US infrastructure projects such as power plants, bridges, tunnels, roads and ports, the ratings agency said in a report this week. However, the Basel III and Solvency II regulations require banks to hold more capital so S&P expects bank lending to long-term large infrastructure projects to fall and capital markets to make up the difference.

In addition, the so-called Volcker Rule in the Dodd-Frank Act limits the amount of capital that a bank and its employees can put into their own private equity funds, which includes infrastructure funds.

To accelerate the growth of capital markets funding sources further, S&P said some structural changes to the market are needed to attract investors. One requirement is a larger and more liquid secondary market for trading infrastructure debt, S&P said. There also needs to be broader awareness of the risks associated with infrastructure projects, especially for projects that involve a new technology such as renewable energy or that do not have much long-term performance data.

S&P said European banks have traditionally been heavily involved in US project finance through lending, advising or securitising loans but the sovereign debt crisis has led them to pull back from overseas markets.

The report said: “According to the European Central Bank's June 2012 financial stability review, various large EU banks intend to reduce assets by about €1.6 trillion over the next three to four years.”

As European banks become less active, S&P expects their more strongly capitalised Asian rivals to boost their market share. Canadian and US regional banks are also gaining ground.

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