What next for infra bonds and refis amidst Europe's sovereign crises?

July 25, 2011 - PRLog -- Infrastructure projects looking to refinance bank debt in the capital markets will face an uphill task for the rest of this year - and probably beyond - as international bond investors grow increasingly nervous about the slowing global economic recovery and the likelihood of sovereign default in the eurozone.

These heightened market concerns have seen corporate-bond spreads - both investment-grade and high-yield - widen significantly over the last two months. As a “wall” of infrastructure debt incurred during the leveraged acquisition boom between 2005 and 2007 is fast approaching maturity, the timing of this retrenchment in the bond markets is unfortunate, to say the least.

An early casualty of the trend was French toll-road operator Autoroute de la Sud to La France (ASF), which was forced to pull a €500m, seven-year eurobond after launching the issue on July 6 - the day Moody’s decided to downgrade Portugal’s sovereign rating by four notches to junk status.

As the Itraxx Crossover Index widened by 10 basis points to 397bp in response to the rating agency’s move, Société Générale (one of the six lead managers on the deal) issued a statement just before midday confirming that ASF had withdrawn the issue due to the resulting market volatility.

Uncertainty Over Refinancing Wall Of Debt
Specialist debt investor Aladdin Capital Management estimates there are around US$120bn of infrastructure-related loans from the M&A boom sitting on bank balance sheets, and at least 10 large companies across Europe will be looking to refinance such debt over the next year. At best, they are going to have to pay more for capital market debt than they would have been anticipating in January. Meanwhile, some companies at the lower end of the investment-grade spectrum or below may well struggle to find buyers at all at a price they can countenance.

“It will depend on the nature of the project,” said Mark Wells, managing director in the specialised products group at BNP Paribas. “It’s become a very fragmented market, and individual project specifics are becoming much more important.”

Wells added that the impact of being unable to refinance at acceptable cost would also vary with the terms on existing loans. Borrowers who only face small margin step-ups if they did not refinance would be under less pressure to do so than those facing 100% cash sweeps, who would be under great pressure from equity investors to refinance.

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