Lower commodity prices made 2015 a somewhat challenging year for project finance but despite the negative outlook, African deals are still being brought to market, securing finance for longer term investments.
In the mining industry, lower commodity prices have led to deals being suspended, restructured or included in sale processes. Overall, the industry’s focus has shifted from extreme growth in the resource super cycle to an emphasis on securing high quality, core assets, controlling costs and managing capital expenditure.
Mining lenders have had mixed results. Those entering the market early in the cycle continue to struggle with difficult assets and restructurings, while more recent entrants believe that if the economics look strong at these prices, the assets are worth financing. There is also a noticeable new flow of Development Finance Institution (DFI) funding, including for mining-related “pit to port” infrastructure such as roads, rail lines and ports.
As with mining, many oil and gas projects have either been shelved or postponed. Marginal oil and petrochemical products producers are being pushed to the financial brink as demand for oil and petrochemical feedstock in China declines. The recent lifting of trade sanctions on Iran, with increased levels of crude production forecast, is likely to exacerbate the situation. It’s not all doom and gloom, though. Producers are looking to alternative or new markets like Africa and India where strong demand remains. Where indigenous resources are in short supply, for example South Africa, Kenya and Nambia, integrated LNG to power projects are expected to increase.
In renewables, finance from infrastructure funds and bonds has supported new projects, although the market is dominated by those regarding project finance as the preferred method of funding. Financing construction risk continues to prove problematic so larger, complex projects are still reliant on non-recourse project finance debt. Despite predictions, sector expertise within project finance banks, increasing competition driving down pricing and a sharpening of pencils on covenant packages, mean that lenders still have a strong foothold in the sector.
Emerging jurisdictions are increasingly regarded as bankable by institutions that typically only funded projects in developed markets, with increased liquidity coming from commercial and Chinese banks. The African power sector is a real success story: South Africa leads the way by volume, with over 60 power projects reaching financial close in the last few years while the coal base load and LNG-to-power programmes ensure the country will maintain its pre-eminence in the future.
Typically, success of a so-called ‘pathfinder’ project in emerging markets tends to boost developer and lender appetite to fund additional projects. For this reason, the notable 450MW gas-fired Azura Independent Power Project (IPP) in Nigeria and the 340MW Cenpower IPP in Ghana herald a wave of greenfield power projects over the coming months. Similarly, the trend toward smaller scale projects – 50MW and under – is increasing in countries with relatively small populations and lower domestic power needs such as Sierra Leone and Rwanda, which are now seeking to add additional generating capacity.
In the infrastructure space, the trend toward ambitious government-initiated, resource-related infrastructure pipelines and projects continues in emerging markets. However, lower commodity prices, reduced government revenues and political and regulatory uncertainties associated with conducting business in emerging jurisdictions continue to impact access to project financing for these deals.
Despite the gloomy forecasts during 2015 and in early 2016, there are still good projects being brought to market. Whether it is pathfinder projects in the African power sector or restructuring deals in the mining and oil and gas markets, 2016 is so far proving to be another exciting year in the world of project finance.