Infrastructure financing: A cornerstone of the recovery
In 2019, BBVA carried out a strategic reassessment process to delve further into its transformation and adapt to the overarching trends that are reshaping the world and the financial industry: Sustainability and digitization are two of the major challenges of this age and BBVA's ambition is to help its clients tackle this process. Jaime Artola, BBVA's Global Head of Structured Finance, shares his strategic vision regarding how the bank can leverage this business to progress towards achieving its purpose.
'Project finance' is a structured financing arrangement based on the long-term cash flows generated by a company set up to execute an infrastructure project, taking the company’s assets as collateral. The truly unique characteristic of a Project Finance arrangement is that it is structured based on the long-term predictability of its cash flows in accordance with a structure of fixed contracts with its customers, suppliers, market regulators, etc.
As a pioneer in project finance, BBVA has led the financing of a range of landmark infrastructure projects, making pivotal contributions to the development of the economies in which we operate. Specifically, the bank has provided financing in key economic sectors such as energy, transportation or social infrastructure, particularly in health and education.
The project finance business, in many cases, contributes to improving the sustainability and digitization of our economies. It is one of the main products that we offer to our BBVA Corporate & Investment Banking clients. Bearing this in mind, in 2019 we decided to launch an ambitious plan to foster both this business’ growth and increase the contribution of BBVA’s investment banking unit to the Group.
Sustainability is a long-term driver of value. Companies capable of transforming their activity to make it sustainable will benefit from greater competitive advantages in the long term, while creating value for the societies in which they operate. At BBVA we firmly believe this and we have participated in the main sustainable projects across in the geographies in which the bank operates. During the first half of 2020, BBVA participated in the origination of 11 new sustainable project finance arrangements, worth a total of 5.4 billion euros.
One sector in which we have been particularly active is offshore wind power generation. Despite their complexity and lengthy development timeframes, these projects, by phasing out polluting technologies, have a tremendous potential to contribute to the transition towards a sustainable economy. Some good examples of this type of pioneering projects are: Saint Nazaire, sponsored by EDF, the first offshore wind farm in France, or Kincardine in the UK, sponsored by ACS, the largest floating offshore wind farm in the world.
Digitization is the other major trend that the bank has been focusing on for a number of years. What back then seemed like a big gamble, today is an essential reality for any company. The deployment of 5G technology has already begun and will be pivotal for the Internet of Things to make its way into our lives, opening a brand new world of opportunities. This is - and will be - true for both small and medium-sized businesses and large corporations, which are already working on new ways of interacting with their customers and clients and addressing their needs.
The deployment of fiber optic networks and the upgrading of data centers and telecommunications towers, which are both essential components of 5G technologies, requires tremendous investments in infrastructures. In recent months, the BBVA team has structured several projects, in Spain and also in France, Portugal, Latin America and the US, taking on different segments within the value chain (data centers, fiber optics, telecommunications towers or submarine communications cable). Noteworthy projects in this area include the financing of the acquisition of Telefónica’s data centers by Asterion Industrial Partners; financing Orange's fiber optic deployment in France; financing of the acquisition of Altice's optical fiber in Portugal by Morgan Stanley Infrastructure Partners; or the acquisition of Telefónica's mobile telephony towers in Germany by Telxius.
Putting clients at the heart of our decisions has been key to our plan’s success
Putting clients at the heart of our decisions has been key to our plan’s success. They are facing the same future challenges we are. And for this reason, we have invested in building the capacities we need to provide them with differential solutions that support their transition. BBVA's global sector teams deliver the best service to our clients across the group’s entire footprint and, together with our local specialists, they form highly skilled teams, capable of providing efficient solutions for each transaction.
The current scenario and our prospects for the coming months are clearly marked by the evolution of the COVID-19 pandemic. We have witnessed how economies were put into lockdown, large industries shut down production and demand for goods and services plummeted. This has also affected 'project finance' transactions. Large infrastructure operators, utilities, and construction companies have reinforced their liquidity by turning to financial markets - both banking and capital - to weather the pandemic from a position of strength. On top of this, due to the rationalization of investments, large infrastructure projects have been pushed back, if not cancelled, until post-pandemic demands can be properly assessed.
Additionally, the current crisis has created a new paradigm that adds more uncertainty when predicting the future use of infrastructures. This uncertainty has a direct and very relevant impact on acquisition processes, since it makes it particularly hard for buyers and sellers to agree on a price and therefore close a deal.
But not everything is negative; the uncertainty will eventually come to an end and the need to finance infrastructure will continue, this time with many lessons learned after analyzing asset behavior in different sectors. We have seen that sustainable assets and telecommunications infrastructure have suffered the least. The performance of telecommunications infrastructures has beaten expectations, as the growing need for this type of assets has become evident. In fact, within their reconstruction roadmaps, governments have assigned a prominent role to infrastructures, as they are a cornerstone that enables economic development.
BBVA is, without a doubt, ready to step up to the challenge and tackle it with optimism and the conviction of having focused our efforts on what brings growth to our business and credit quality to our portfolio, but, first and foremost, on what improves the lives of the people in our communities.
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