The debt structures being used may make that difficult. One
popular technique is the accreting swap—effectively a low-start, mortgage-type
product. Principal and interest payments are deferred for up to 10 years. The
principal remains unpaid and the interest rolls up—meaning the size of the debt
grows for the first decade. This technique was the driving factor behind the
success of the Chicago Skyway, M6 and ITR refinancings. However, a project with
a debt burden that increases over time needs a very strong and growing cash flow
to service it. Successful projects usually track the increase in economic
growth. If GDP grows at a modest pace, investors seeking outsized returns need
to turn to financial engineering (like accreting swaps) or change the project.
For example, for the ITR project to be profitable, the owners need to double the
toll in four years and increase it further in the future. Investors should therefore use caution, especially because the
infrastructure investment funds, and the banks that back them, charge high
transaction fees. The Macquarie Infrastructure Gateway Investment Fund, which
targets the private investor market, charges a 20 percent performance fee on
returns of over 8 percent, in addition to the usual fund advisory fees. In any
of these transactions, if the margin for error between predicted growth in cash
flows and predicted growth in debt is narrow, investors may find themselves in
the same position as de Lesseps’ frustrated backers. Art by Matt Mahurin.
 | Rod Morrison is the editor of industry newsletter Thomson Financial
Project Finance International. |
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