Our long held concern over the effect that weakness within the French banking sector will have on the French PPP market has been validated with the government's decision to get institutional investors in to fund road projects. We first raised a red flag on the risk that banking sector weakness poses to the French infrastructure sector in November 2011, noting that:
With the French banking sector a key financier of French infrastructure, and with the leading French banks among Greece and Italy's biggest creditors, we were already concerned about domestic infrastructure project finance. (see BMI's online service, 'France Infrastructure Concerns', November 11 2011).
The government's announcement in late February 2013 that it is looking for alternative sources of financing for road PPP projects, to make up the shortfall from commercial bank loans, is the clearest indication to date that this concern has now become reality.
The Ministry of Ecology and Development and Energy is undertaking a consultation process, running until 19March, looking into replacing bank debt with bond financing for road PPPs. According to a statement by the French ministry, cited by journal Infrastructure Investor, this is especially pertinent for projects exposed to traffic risk. The government is therefore looking to consult with institutional investors such as pension and insurance funds and debt funds, on how to expand the financing structures of its PPP programme.
This is the culmination of several months of a weakening market. The most notable example of the weakness of the French project finance market was the collapse of the Strasburg Bypass PPP in June 2012, when the Vinci-led consortium failed to arrange financing (circa EUR750mn in total) by the deadline set.
French banks were amongst the largest financiers of project finance in Europe, primarily fuelling a French infrastructure market that had heavily endorsed the private procurement method for economic and social infrastructure. League tables paint a crystal clear picture on the retreat of the French banks from project finance.
In 2010, the three largest French banking groups were amongst the top five debt providers globally. In 2012, BNP Paribas is in 8 th place, while the other two have disappeared from the top 10 table.
|Rank||2012||No. Of Deals||Value, US$mn||2010||No. Of Deals||Value, US$mn|
|Source: DealLogic, Project Finance Magazine|
|1||Mitsubishi UFJ Financial Group||122||13,718||State Bank of India||105||12,900|
|2||State Bank of India||67||8,940||BNP Paribas||83||9,800|
|3||Mizuho Financial Group||70||7,969||Credit Agricole||84||6,890|
|4||Sumitomo Mitsui Financial Group||85||7,784||Societe General||73||6,300|
|5||HSBC||67||7,400||Mitsubishi UFJ Financial Group||78||5,890|
Their retracement from the market is therefore a precursor of tighter credit conditions for the European PPP market (though it should be noted that institutional investors and sovereign wealth funds are keenly scouting for opportunities, especially in Western Europe and therefore we anticipate that they will make up for the shortfall).
2012 saw a lull in the European PPP market. According to data published by the European PPP Expertise Centre (part of the EIB), the European PPP market recorded its lowest volume of transactions in a decade. The value of transactions in PPPs in Europe reaching financial close over 2012 was EUR11.7bn, 35% lower than 2011, of which the greatest share came from the UK, followed by France. The Nimes-Montpellier high speed rail, and the Paris supreme court PPP were the two flagship French projects to close over 2012.
Not only has commercial bank project finance become scarcer, but also more risk averse and therefore more expensive. The average value per deal in Europe decreased by nearly 15% over 2012, while the premium paid over LIBOR or EURIBOR was 300bps for greenfield projects, up 30% y-o-y, according to EPEC data.
BMI has a bearish outlook on the French commercial banking sector for 2013, which, according to our France Country Risk analyst, is due to: weak domestic demand, an increasingly stringent regulatory environment and growing risks of deterioration in mortgage-book quality driven (see BMI's online service 'Low Growth Environment Lies Ahead', 18 October 2012). There is not therefore scope for an improvement in the PPP-lending capacity of the French commercial banks; on the contrary we expect to see further retrenchment. This reinforces our bearish view of the French construction sector, which is heavily based on public spending and big ticket PPP projects.