The nature of the current credit situation is complex, but its impact on the PPP market can be summarised as follows:
- The collapse of the inter-bank lending market has drastically reduced liquidity. Most banks, particularly those with limited deposit bases, are struggling to raise funds even on short maturities.
- Project finance and PPP lending is competing for scarce regulatory capital allocations with more attractive corporate opportunities. This is testing the viability of the current PPP model.
- The syndicated loan market has stalled and deals are closing as ‘club’ transactions. This has an impact on the speed with which deals close.
- Bank margins have increased substantially.
- Senior bank debt tenors have significantly reduced.
- Some banks have partially or totally withdrawn from the Project Finance market. There is also evidence that previously active international players have become more orientated to their domestic markets. “Relationship banking” is back in force.
- No viable capital market solution has emerged to replace the wrapped bond market which closed with the demise of the monoline business.
However, the PPP market has not collapsed. Deals are still being brought to market and closing, albeit more slowly. There is a high degree of selectivity on the part of banks and a general lack of consistency in the terms and conditions required by funders.