Project Finance Hits Five-Year Low, but Other Debt Markets Recovering

Global project finance volumes for the first half of 2014 were the lowest for five years, with 30% less financing being made available than over the equivalent period last year.

Four hundred and sixteen projects were completed in the first half of the year, down from 586 in the first half of 2013. It was the lowest recorded figure since the first half of 2009, where there were just 363 projects completed.

In terms of volume, there was $160.4bn (£93.6bn, €118bn) in project finance secured in the first six months of 2014, a drop of 30% on the first six months of last year.

Year-on-year, loan, bond and equity financing for projects fell by 25%, 32% and 48%, respectively, showing that no vertical flourished, despite widespread optimism about the recovery in the global economy.

Discussing the figures' with IBTimes UK, however, the global head of project finance at law firm Baker McKenzie, Calvin Walker, urges caution and says that the raft of large projects which have closed in recent years may help explain the lull over the first half of 2014.

"I wouldn't milk 'the death of the project finance market'," he said. "It's quite a challenging time, there's still fallout from the financial crisis. Given that deals can be four, five years - even more - in gestation, we're reaching the time now when some deals from the financial crisis are coming to fruition."

The figures are part of a suite of six-monthly data released by data services firm Dealogic, of which project finance is the least encouraging. The project finance stats, however, only reflect funds that came from the commercial banking sector. One takeaway may be that lending is coming from different sources.

Despite the furore over export credits - particularly in the US, where the export credit agency (ECA) the Export-Import Bank of the United States, is in danger of being closed down - it is still a common source of finance for projects in riskier, less developed markets.

In Africa, many projects are led by ECAs and development banks, with commercial banks proving to be more risk-averse.

Furthermore, institutional investors have been more willing to originate and lend on deals on a primary basis, rather than joining deals secondarily as in years gone by.

Last week, German asset manager Allianz Global Investor announced a kitty of £500mn - to be raised from institutional investors including insurers and hedge funds - for the UK's infrastructure projects sector. The company has already been involved in a raft of UK projects including a £175 road project in Scotland, agreed in February of this year.

In other news emanating from Dealogic's stats, overall M&A volumes were up by 42% to $1.83tn over the same period, spearheaded by a 54% jump in deals in the Americas, which claimed the highest first-half share of any region since 2001 (51%). And, in spite of the failure of Pfizer's bid for AstraZeneca, healthcare and pharmaceutical provided the lion's share of the deals.

The global syndicated loans market grew to its highest level since the first half of 2007, reaching $2.08tn, 3% up on last year's period. This is despite a drop in activity, with total deals falling by 3%. Surprisingly, Asia Pacific was the only region to record a year-on-year drop in loans volume, with a slight decrease of $2bn.

The majority of the lending in this market was for refinancing purposes, suggesting that the large-scale origination market performed poorly.

Dealogic statistics are widely cited as reflecting the health of the lending industry across numerous verticals. However, despite being used everywhere from the Treasury to the FTSE 100, the statistics are often disputed by those in the industry.

Earlier this year, trade finance banks hit back at Dealogic's claims that the global market had fallen for the second year in succession.

The Dealogic data is not a full representation of the trade finance market. The value of letter of credit trade in 2013 alone was 25 times more at $3.124tn (according to Swift statistics). How can the global trade finance volume decrease 32% to $124.1bn from $181.5bn in 2012 if the value of LC trade grew by 9.4%?" asked Ashutosh Kumar, Standard Chartered's global product head for cash and trade in January.