Robert Bartlett and Rishi Nihalani from MUFG anticipate a shift away from just core assets
There is an abundance of debt available to competitively support the financing – and now increasingly the refinancing – of core assets, which we would define as energy, natural resource and infrastructure assets that are regulated, monopolistic and have high barriers of entry. For these assets it is firmly a borrower's market: the variety of debt funders and debt types has never been broader or more competitive since the global financial crisis.
Alongside the traditional funders including banks, development agencies and public capital markets, we have seen the emergence of new yield-seeking funders becoming the mainstream, for example US and European private placement investors (making cross currency investments). Many of them have proven to be as flexible as they are competitive both in terms of floating and / or fixed rate funding.
As equity and debt markets become increasingly competitive, we are seeing equity chasing broader classes of assets and with debt following; the so-called core plus assets. While there is significant appetite from debt funders to provide leverage into core plus investments, these assets are seen as having greater market risk, short term offtake arrangements and often the need to believe in expansion/growth stories. The funding structures therefore remain relatively conservative when compared to core assets. This is because unlike the pre-crisis era, the structuring fundamentals remain sensible as risk continues to be rationally evaluated and well understood.
The well documented lack of primary core deal flow is not likely to vanish any time soon, so there will likely be growing focus from equity and debt investors seeking yield on core plus assets, perhaps broadening the definition of the asset class even further, core plus plus. As this happens, we expect core plus sectors to become better understood, and some asset classes even commoditised. As new entrants enter the sector ,we will see further improvement in terms and structures; the supply of and demand from liquidity is certainly out there. As and when the new core plus sectors become better understood by debt and other equity funders it is reasonable to expect the rewards to those who have taken the risk of developing the new sectors to come via re-leveraging and/or secondary market disposals.
MUFG is very much of the view that core plus will become an important feature of the project finance market in the coming year.