The COVID-19 situation has impacted global markets, with particular complexity for investors and lenders in the energy and infrastructure sectors. We are tracking market developments closely for our clients involved in the development, financing, construction, operation and acquisition of projects. These are our thoughts on the state of the market right now.
Two facts bear remembering. First, despite near term dislocation in capital, labor and commodity markets, the fundamentals for the project finance market remain strong compared to other sectors. Energy and infrastructure assets serve essential public functions and provide long term, stable cash flows that typically prove resilient even through severe economic and political disruptions. That advantage has not changed.
Second, the very real economic and public health responses to slow the spread of COVID-19 will impact project finance transactions now through Q3 2020 in widely varying ways depending on three key factors:
- Sector – Infrastructure and power assets (including many renewable energy projects) with long-term contracted offtake or tax and regulatory incentives remain fairly insulated from market shocks, at least for now. We expect transactions in those areas (including tax equity investments) to remain robust and potentially to benefit from government stimulus in a recovery. Some investments (such as digital infrastructure projects) may even benefit from social distancing and longer term shifts to working remotely. In contrast, companies with commodity market exposure (like upstream and midstream oil and gas), in aviation, ports, and logistics, or with merchant or toll risk have been more heavily affected by current volatility and demand shocks.
- Stage of Development – Projects that are nearing or under construction appear to be more at risk (at least of being delayed) than projects that are either operational or in the very early development stage. We are already assisting clients in managing supply chain interruptions and related issues, including force majeure claims and change order requests, delays in construction, labor shortages, new ratings and financeability hurdles, insurance challenges, and so forth. Our lawyers can explain the nuances of how these issues are likely to be addressed under either US or English law and in cross-border transactions. It pays to get ahead of critical issues before they arise, where possible, and to anticipate how best to navigate through uncertainty.
- Financial Strength – Financial market turbulence has increased the pressure on projects with pre-existing distress, and the uncertainty associated with COVID-19 has delayed some decision-making by investors, ratings agencies, and financing parties. That said, liquidity and access to capital do not yet appear to be impaired in the longer run; this is not a 2008-2010 style financial crisis. But for distressed projects, both owners and lenders should be proactive in workouts and collaborative restructurings to forestall insolvencies. Consents and waivers will be needed for some operating projects if a prolonged downturn leads to covenant noncompliance. Distressed assets are already creating attractive secondary market opportunities for buyers, including PE and infrastructure funds seeking to deploy capital once financial markets recover and demand stabilizes.
As the COVID-19 situation develops, Milbank’s lawyers remain available to share real-time insights with our clients and to collaborate on innovative solutions to meet rapidly evolving challenges.
For additional insights into the business and legal implications of the COVID-19 pandemic, please visit our Knowledge Center.
