What’s priced in for 2024’s project finance market?
Market sentiment does not yet point to rosy times ahead. But it does paint a picture of an industry that has come to terms with the impact of recent economic conditions, and is poised for growth
Project financings, those large, labour-intensive, exhaustively negotiated transactions, frequently take so long to reach close that they are lagging indicators of economic conditions. For projects with drawn-out procurements or featuring components with long lead times, that lag can be extreme.
Even as base rates climbed from close to zero over the course of 2022, project finance volumes climbed nearly 35%, according to data from Proximo Intelligence. It was over 2023, as the Secured Overnight Financing Rate reached its peak, that there were signs of a modest slow-down in volumes, though this varied between regions and sectors.
Was this a brief hiccup, or a premonition of a more pronounced depression in infrastructure finance volumes? To get an idea of where activity levels might be heading, Proximo turns to a less lagging, more forward set of indicators – its 2024 Project Finance Research Report, which is available now.
Even in 2023, respondents to the survey covered in our report were generally fairly upbeat. Descriptions of the market as positive, dynamic and healthy were the most common adjectives in both 2023 and this year. But the adjectives that recorded the most substantial drops were unclear and reactive, with a smaller reduction for uncertain and healthy. There has also been a small increase in the proportion describing it as slow.
The most obvious barometer of sentiment is debt pricing, and our sample’s experience reinforces the picture of a market adapting to the new normal. There was a small increase in the proportion saying pricing increases were as expected, and a big increase in the proportion saying it has not budged.
The anecdotes are also there to support this picture, with bankers contacted by Proximo expecting an increase in refinancing activity, after a patchy couple of quarters, and hoping for a pick up in M&A activity, still an important driver of project finance debt volumes. Whether through taking on new technological risks, or greater degrees of market risk, banks are likely to justify that new higher pricing, and satisfy the demanding and sophisticated financial sponsors that dominate greenfield and brownfield activity.
There are some small differences in outlook within Proximo’s sample. Bankers appear to be more likely to predict a decrease in pricing in the coming months than sponsors, even though this would probably be less supportive of their profitability. This probably reflects banks’ wider awareness of market conditions.
The Proximo perspective
But this survey overall represents a strong vote of confidence in the viability of project finance debt as a solution for building out infrastructure quickly and at scale. This is despite some of the challenges in structuring deals listed above - not to mention the recent regulatory changes that make it harder for banks to book and hold project finance loans.
Project finance banks have proven adept at coping with these changes, by improving portfolio management techniques, and expanding their distribution activities to include debt funds and private placements. They have convinced financial sponsors that they can support ambitious development slates with large tickets and flexible structures.
It is probably too early to say whether 2024 can exceed the volumes posted in 2022 and 2023. But our survey suggests that the best in the project finance market is yet to come.
