Restricted commercial bank capacity has put an increased demand on multilateral and development banks and export credit agencies. Commercial bank lending has effectively dried up for project financings in emerging markets, particularly in regions where there is any perceived degree of political risk. Commercial lenders might once have looked benignly upon umbrella political risk insurance, an export credit agency (ECA) guarantee or, indeed cofinancing with a development finance institution as a B loan lender. The crunch has curtailed their interest even in these products. But Rashad Kaldany, a vice-president at the International Finance Corporation (IFC), specialising in Asia, Middle East/North Africa and global infrastructure, says that, despite the financial turmoil, "It's an exciting time, and the role of multilaterals has changed dramatically in the last six months".

The economic downturn is now commonly split into two phases: pre- and post-Lehman. In the year or so pre-Lehman, although project sponsors and lenders were erring on the side of caution, financings for deals were still being closed in emerging markets, and in some cases, even without support from development finance institutions (DFIs). Post-Lehman, there has been no significant project deal to reach financial close in an emerging market without an overwhelming DFI presence.

The depth of the collapse in liquidity, and the accompanying economic shocks, are such that some sponsors are taking commercial bank disinterest as a cue to delay projects. Kentaro Tsuboi is the deputy head of the Japan Bank for International Cooperation's (JBIC) banking department covering Europe, Middle East and Africa, and chairs the project finance committee it established in July 2008. He notes that, "the dearth of liquidity in the commercial bank market, since the Lehman shock, has delayed many projects as arrangers just can't finance them."

Even where debt is available, it might come at such a steep price, and have such exposure to commodities prices, that some sponsors will delay their projects, waiting for the price of inputs and debt margins to decrease. Tsuboi notes that sponsors have been particularly prone to do so on Middle Eastern petrochemicals projects. These postponements will prevent a hypothetical adventurous returning lender from exerting any downward pressure on pricing at all, since the multilaterals lack the inclination or flexibility to do so, except in very limited circumstances. Whatever DFI solutions are offered can only work to bolster these markets in the short term. Douglas Bennet, a senior investment and guarantees executive at Frontier Markets Fund Management (FMFM), says "it will take the commercial banks to be able to raise their own financing at reasonable rates to come back in, to drive the pricing down."

For every season there is an initiative

The development finance institutions are acutely aware of the pressure to step up and plug these holes in the project finance market. Their focus during the last decade has been upon being more responsive to sponsors (as well as, in the case of the ECAs, to exporters), or upon stimulating private markets' ability to meet project debt requirements through offering products such as partial risk and currency guarantees. With the outright withdrawal of commercial banks from the markets, and with sponsors anxious to maximise their access to direct lending, these initiatives are of limited utility.

So the multilaterals, at least, have developed a new set. Many of the international DFIs have begun to formulate strategies, with greater and lesser degrees of formality, which would address what their new role is and how they can fill it. "Demand on services has ballooned," says Kaldany, "so we are seeing all kinds of new and non-traditional funding sources being mobilized, from government and sovereign funds for example, and our service provision is also changing."

The IFC has rolled out three new financing programmes, and hopes that other multilaterals will follow its lead. It has increased its global trade finance programme from $1.5 billion to $3 billion over three years, to meet the short-term funding requirements of emerging markets exporters. Some of this funding might be in the form of equity, of which the IFC has always been a provider, and some as investment guarantees, which has normally been the province of the Multilateral Investment Guarantee Agency (Miga), like the IFC a member of the World Bank Group.

The IFC is also following the lead of the world's governments, and attempting direct equity injections into lenders in the hope that this will stimulate them to resume lending. Its bank recapitalisation plan involves investing equity to recapitalise struggling banks that invest in developing countries. The fund has launched with a target of $5 billion: the IFC is committed to invest $1 billion over three years, and JBIC is to invest $2 billion. Still, such numbers are small next to the equity that developed world governments are pumping into their banking systems, and the IFC will struggle to focus clients' attention on projects close to its heart if these are not also priorities for the bank's home governments.

The IFC infrastructure crisis facility probably answers sponsors' needs most directly, because it contributes cash to projects most directly. In the top tier of emerging markets that have not normally been targets for DFIs, and where the commercial bank sector has become the first port of call, this funding should provide relief. In other markets, particularly those in Sub-Saharan Africa, DFI lending has always been the only option for sponsors and often exceeds the supply of financeable projects.

The crisis facility, set up as a fund, has a target of $10 billion. The IFC has contributed $300 million in equity to the fund, and says that donor governments and other DFIs are planning to make another $1.2 billion in commitments. The agencies see such funding as a synthetic B loan, since the fund will lend the money for between five and ten years, price it such that there is an incentive for sponsors to refinance with commercial debt when markets settle, and will not include prepayment penalties.

Some export credit agencies had already been stretching their remit to support exports and investment overseas. JBIC's project finance efforts were so large and aggressive that its project finance function, once concentrated in a single division, has now been dispersed among sectoral and regional departments, and Tsuboi's committee is the remnant of that central department. Underscoring JBIC's domestic, as opposed to international, development focus, it has been subsumed, alongside institutions working with micro business, small and medium businesses, and agricultural enterprises, within the newly-established Japan Finance Corporation.

JBIC, which once led the other ECAs in providing such products as holding company debt and portfolio financing, is also trying to work out how to adapt. Tsuboi notes that JBIC normally does not provide a committed financing before a project has been awarded, and it cannot increase its lending to more than 60% of debt financing for a project. "Despite these limits, demand for JBIC financing is increasing, and we are doing our best to ensure that essential projects can go ahead. In some projects, the sponsors have opted for bridge loans or mini-perm loans in order to move ahead, with plans to refinance these loans once the market returns to normal", he says. "We can give a commitment in advance to a refinancing of a short loan as long as there are commercial banks willing to come along with the refinancing at the same time. This can provide an incentive for other commercial banks to get on board with the project."

But sponsors cannot assume that ECAs will be able to continue to stretch their terms for exporters. Jang-Hee Park, deputy director of project development at KEIC, a Korean ECA, has noticed a move to prudence in project support. "Market appetite is changing to digest medium-sized deals due to the shrink in liquidity and less willingness to lend," he says.

Park argues that the increased demand on ECAs could result in a decreased ability to participate in large project financings. He notes that, "Commercial players judge a project on its merits. In a less stressed market, banks will be more inclined to be involved in a project if an ECA can mitigate some of the political and commercial risk. However, in times of financial disruption, they will use ECAs as much as possible, although they have to accept a lower rate of return."

ECAs are well positioned to achieve the best results without tinkering with their lending standards by nudging exporters into looking at new markets. However, Park notes that some ECAs will continue to innovate for better performance and stresses that, "KEIC is introducing a cover for bridge loans and refinancings to satisfy market demand". Although the Middle East, particularly its petrochemicals sector, is possibly the most important market for Korean export finance, Park says that Korea needs to look towards other markets, which have seen less disruption in recent months, and that KEIC is looking to develop its potential in Latin America, central Asia, Russia, and Africa. KEIC has already built up an enviable franchise supporting Korean boiler exports and engineering, procurement and construction contracting in the Chilean power sector (with over $1 billion in coverage for the EPC contractor on the Angamos deal), filling the void left by newly-cautious commercial banks' retrenchment.

Conservatism and cooperation

Though multilateral and bilateral agencies can go some way to relieving pressure on project financings, their input is not a panacea for sponsors, if only because they lack the capacity to replace commercial debt altogether. Their terms may be the result of policy decisions rather than commercially-driven, but they may nonetheless need to tighten up terms and lending criteria

Jean-Marc Aboussouan, infrastructure division chief at the Inter-American Development Bank (IDB), notes that in response to the increased demand, multilateral lenders are forced to be more selective about how and where they lend: "For example, in the energy sector, the agencies are likely to prioritise clean energy, and wind deals, to respond to the global government push to move for renewable sources of energy to reduce impact on global climate change." Large natural resources projects, which make outsize demands on DFIs because of their environmental due diligence requirements, and attract outsize attention from non-governmental organisations, could be the losers.

Kaldany says that the IFC is now more aggressively offering convertible loans to those sponsors in urgent need of debt. Such products, which can dilute sponsor equity interests if lenders exercise their conversion options, are not new, but during the good years for credit, sponsors would only use them as a last resort.

Frontier Markets' Bennet notes that DFIs are in many instances re-entering markets from which they had withdrawn as they were adequately serviced by stiff commercial competition. But, he also believes that the resulting situation, of conservative selectivity, is something of a shame, as smaller, marginal, and potentially riskier projects will not get the funding they need and that should be provided by PFIs: "The organisations are getting more conservative, and their credit requirements are greater, in needing extra guarantees, reducing their credit risk, and putting more commercial risk on the sponsors. Credit departments now have much more influence over the investment departments."

The crisis has arguably reduced competition between DFIs, which, on occasion, sponsors had been able to exploit. The sponsors of the Rabai power project, for instance, had been able to exploit this competition by holding a funding between the IFC on one side and a group of European development banks and the Frontier Markets-managed Emerging Africa Infrastructure Fun on the other (see Deals of the Year, this issue, for details). As Kaldany wryly notes, "misery loves company!" He continues, "The level of cooperation between multilateral and bilateral agencies has increased dramatically, and there is much less of a competitive element to deal-making."

Aboussouan agrees; "We are going to see more and more coordination with other agencies, and club deals only, without B loan syndication risk." He believes that large financings such as those for the Panama Canal expansion or Peru LNG, where the club of arrangers comprised a number of DFIs, will become more commonplace, and also notes that the IDB's involvment with institutions like IFC, CAF and other international agencies at early stages of infrastructure project cycles will also increase dramatically. "Panama was unique in its nature and a huge deal [$2.3 billion debt], which required a long-term financing under terms and conditions more difficult for commercial lenders; for example a commercial tranche could not allow an eight-year minimum grace period, even in better circumstances, and would not have been able to offer maturities of longer than ten or twelve years."

The financing for the expansion of the Panama Canal attracted furious jostling amongst lawyers and banks for the high-profile mandate, even as the Canal's authority stayed studiously vague about its preferred financing structure. In the end, Mizuho won the advisory mandate, and two other Japanese banks, SMBC and BTM UFJ, came is co-financing providers on a JBIC-led tranche. Rounding out the financing, which had complete recourse to the Authority, though not its assets, were direct loans from the European Investment Bank, IDB, IFC, JBIC and the Andean Development Corporation (CAF). For the long-awaited Peru LNG financing US Ex-Im, IDB, IFC, Kexim and SACE put together the financing, with Société Générale, BBVA, Calyon, Sumitomo, ING, Mizuho, and Bank of Tokyo Mitsubishi as B-loan lenders, though that deal closed well in advance of the Lehman collapse.

Silver linings, not silver bullets

If there is one positive result from the crunch, it is that some developing countries' economies may suffer limited damage, and local currency financing might come into its own. Traditionally strong currencies such as the dollar and the pound have depreciated against some of their less powerful peers. Bennet has seen, through the EAIF and the GuarantCo vehicle, which FMFM also manages, that "there is much more of an appetite for local currency product in some African countries, and if an African bank has robust local deposits, sponsors are considering mixing financings, to use both cross-border and non-dollar debt."

The Indian market is also opening up to foreign lenders. "India has a large, sophisticated domestic market but still requires foreign investment," says Bennet. "The Reserve Bank of India capped earnings on foreign debt at a margin of 250bp over Libor. As foreign investment dried up, it increased the cap to 350bp, then 500bp, and now it's unrestricted." India, and to a lesser extent China, have shown a marked independence of foreign debt sources, certainly compared to markets in Eastern Europe and the GCC region. But China's economy is far from independent of its export markets, as evidenced by its recently-announced stimulus package.

China may be able to use traditional tools to refloat its economy, especially since it keeps such a tight grip over its banking sector. The multilaterals and ECAs it is still unclear whether a return to their roots as direct lenders to cash-strapped governments will be either a temporary measure or an effective one. At the same time the raft of new lending programmes, and the adaptation of pre-crunch products, has yet to be seriously tested. If the commercial bank sector does not recover as fast as they hope, the stresses will be considerable.