Infrastructure finance and Public Private Partnership (PPP) projects are going to be expanding product areas for newly-named HSH Nordbank, which was formed in June as a result of the merger between Hamburgische Landesbank and LB Kiel.

Prior to the merger, LB Kiel had already been an active player in PPP business in Germany, Scandinavia and the Baltic States, and the newly-merged entity is poised for growth. The bank has a strong balance sheet, with around Eu180 billion worth of assets, and one of the better return on equity (ROE) levels among German banks. So, in addition to structured finance arranging and advisory work it also intends to increase the size of its own project loan book.

"Right now in Germany we are one of the few banks keen on adding new loans to our balance sheet,? says Dr Ansgar Bendiek, HSH Nordbank's Head of the Infrastructure & Maritime team, which from September onwards will be based in Hamburg.

?We would like to build up our assets, especially in infrastructure finance, because we don't have that much of a portfolio. This is different in other departments such as shipping and aircraft, which already have high volumes of loans on their books, and will be selling or securitising some parts of their portfolio as well as taking on new assets." He notes that a synthetic securitisation of aircraft loans was completed by the bank, pre-merger, two years ago.

But even though the infrastructure team is adding assets to the balance sheet, nonetheless secondary market liquidity is important.

"One of our main objectives is to have a tradeable portfolio," Bendiek explains. "At the moment it is the strategy of HSH Nordbank to accumulate more loans on our balance sheet because we want to grow, but you need to be flexible, and we want to be in a position to sell some of these later on in order to be able to add new assets to our portfolio."

The strategy at HSH Nordbank is to be able to offer clients a complete range of advisory services on projects, as well as being able to provide financing at the equity, mezzanine and senior level.

Quasi-equity and infrastructure funds

?Right now as a bank we can't take equity in projects, but we are willing to provide quasi-equity such as mezzanine loans, and we are studying the possibility of setting up an infrastructure fund which invests in PPP and infrastructure projects,? explains Bendiek. ?We think that our clients are not looking just for simple arrangers and debt providers, but are also looking for services such as consultancy, and want a bank which can provide them with all financing products, including mezzanine and equity. We started this mezzanine approach with the London Underground last year, where we were one of the co-arrangers of the mezzanine facility for Tube Lines.?

?Pricing on the plain vanilla senior loans is quite thin, so it seems to make sense to build up a portfolio of those PFI type deals and securitise them, while keeping the mezzanine pieces,? Bendiek explains. ?Nobody has so far done a securitisation of PFI loans, but this will happen in the future, and is likely to be initially driven by the big UK PFI market players, who have large volumes of loans, since you will need at least Eu500 million in order to do a securitisation.?

?We are interested in the UK PFI market, but without the ability to securitise we would not take that much on our own books,? he says. ?I think you can only meet your ROE expectations on UK deals when you earn some upfront fees via a club deal or as an arranger. It is difficult to achieve your ROE targets in the UK simply by participating in loans.?

One deal which recently closed was the E39 road project in Norway. In late June syndication of a NOK1.43 billion (Eu188 million) term loan facility for Orkdalsvegen was completed. The group of lead arrangers comprised HSH Nordbank, Nordea and Svenska Handelsbanken, while the co-arrangers were IKB, ING, Dexia and SEK.

Tranche A totalled NOK1.31 billion, and syndication of this portion was oversubscribed. The NOK300,000 Tranche B has not been syndicated. Instead, Nordic Investment Bank has committed to take out Tranche B upon successful completion of construction, in line with its policy of not taking construction risk.

The E39 near Trondheim is the first PPP road project in Norway, and Orkdalsvegen is a consortium formed by Laing Roads and Skanska BOT, which has signed a 25-year concession with the Norwegian state roads agency.

Continuing with Nordic and Baltic focus

The Baltic and Nordic countries were already major areas of focus at LB Kiel, which was one of the arrangers of the bond offerings for the Storabaelt bridge link connecting two Danish islands, and the Oresund bridge connecting Denmark with Sweden. And the Danish government has now published a new list of PPP projects that HSH Nordbank would like to get involved in.

One major project is the planned Fehmarnbelt bridge, or tunnel link, connecting Rodby in Denmark with Puttgarden in Germany. The total cost will be very large, in the region of Eu5 billion, and last year LB Kiel was involved as a financial advisor to the Fehmarnbelt Link Group, made up of Hochtief, Skanska and MT Hojgaard.

Danish and German government support could be granted in the form of a minimum income guarantee, availability payment or shadow toll. Last year LB Kiel developed a cash flow model to underline the effects of the different support instruments.

In Norway, the bank is acting as financial advisor to a pre-qualified bidding group for the E39 Number 2, which will involve 18km of construction and 38km of operation in the Vest Agder region.

Further east in the Baltics, HSH Nordbank is advising the City of Riga over the Dalgava River crossing, though having won this mandate, together with a legal consultancy firm and a technical consultancy firm, progress had been held up by a legal challenge over the awarding of the mandate.

In Germany, the development of PPP is generally viewed as being disappointingly slow, with events, such as the decision not to use a PPP model for the Strelasund bridge linking the island of Rugen with the Ostsee coast, illustrative of the often frustrating lack of federal and state level commitment to the PPP model.

Nonetheless, in spite of slow progress, there are school and hospital deals moving forward, and LB Kiel did act as financial adviser to a bidding consortium for the Offenbach Schools PPP project in Hessen, which involves 10 schools at 95 locations split into two bundles.

LB Kiel also acted as arranger on the groundbreaking Herrentunnel in Lubeck, and the Warnow Link in Rostock. But now most of the attention in Germany is focussed upon the upcoming program of so-called A Model highway concessions, where truck drivers will be automatically charged by the kilometre, and operators of stretches of motorway will be paid a portion of the calculated tolls.

The first three concessions are likely to be the A1 from the Buchholz motorway junction to Bremen intersection; the A5 from Baden Baden to Offenberg; and the A57 from the Struemp Motorway intersection to the Cologne Nord intersection.

Some of these may be bond financed, though some bankers think that initially the A Model market will not be mature enough for institutional financial investors, and that the big traditional construction industry and BOT players will need to get involved.

For structured finance arrangers there is also a possibility of using products such as cross-border tax leases on PPP projects. This was in fact tried with the Oresund and Storabaelt bridges, and significant progress was made in solving the structural issues. However, as is often the case, the reliance upon US tax investors was deemed controversial, and the Danish government eventually squashed the leveraged lease idea.

But arrangers are likely to try again. ?We have looked at the possibility of structuring a cross border lease for some of the German motorway projects, but we have not found a simple way to do this,? Bendiek says. ?But if it is possible to structure deals for power plants and rail systems then it should also be possible for motorways. Using a lease would be one way of making those models more viable, especially with the reduction in toll levels from 15 cents 12.4 cents.?

In addition to advising and arranging new projects, the bank also intends to be active in the secondary market. As the PPP market matures worldwide, the volume of secondary market activity is on the increase, and HSH Nordbank looked at the Abbey National PFI portfolio when it was put up for sale, though another buyer was eventually found.

Restructuring

The organisational structure of the various HSH Nordbank departments may still be subject to some changes, and consultants are currently working within the bank on this subject. But the initial logic behind putting together Infrastructure & Maritime is that many of the shipping and infrastructure clients are the same, with overlap in areas such as port development, container terminals, and oil storage and tanking facilities.

The Infrastructure & Maritime team is one of four units of the Structured Corporate Finance division, the other three being the Power Sector, Acquisition Finance and Capital Structuring. Other activities such as aviation finance will be part of the Transport team, which will be based in Kiel. Thus, between now and September there will be staff being transferred both ways between the twin headquarters of Kiel and Hamburg as part of the reorganisation.

The overall strategy at the bank is to strengthen its franchise in corporate lending as the leading ?Bank for the North?, while also strengthening its global franchise in areas such as shipping, transport and real estate finance.

Global structured finance has been earmarked for expansion, with a more international outlook helped by an expanded branch network that includes offices in New York, Hong Kong and Singapore. Thus for example toll roads and ports are a likely area of interest in South-East Asia.

The ownership of the bank is now as follows; City of Hamburg (35.38%); State of Schleswig Holstein (19.55%); Savings Banks & Giro association for Schleswig Holstein (18.21%); and WestLB Group (26.86%)

The total assets on the balance sheet stand at around Eu180 billion, slightly less than NordLB, but slightly bigger than Helaba and DePfa.

Like all the landesbanks, HSH Nordbank is having to look forward to the day when the guarantee disappears, and given the long lending terms in areas such as infrastructure, this already has to be taken into account in pricing.

The land guarantees currently give HSH Nordbank a Triple A rating, allowing it to raise funds cheaper than its commercial bank competitors. Debt obligations incurred before July 2005 and maturing before 2016 will be grandfathered, and so guaranteed.

But for long-term infrastructure projects the bank is already looking towards a business model that reflects the disappearance of the guarantees. The strategy is simply to pursue healthy ROE and profitability targets, and ensure that the standalone rating is a good one (perhaps in the single A category) when the guarantees fall away.

Both Hamburgische Landesbank and LB Kiel were among the most profitable landesbanks last year, and with the cost savings associated with the merger HSH Nordbank is well positioned to be among the most active lenders and arrangers in areas such as infrastructure finance.