Although project finance demand continues to increase in the face of rising global infrastructure needs and governments’ promises to boost investment, global project finance lending fell by 17% in 2016. In a new report, S&P Global Ratings explains how long-term project finance has become more expensive for traditional bank lenders due to Basel regulation and increased capital requirements. The report also explores how capital markets may expand in response.
To cope with increased capital requirements – which rose by an average of 40% under the Basel III accord – banks have been utilising credit insurance to lessen credit risk and achieve capital relief. By insuring 35% of a loan, for instance, bank lenders are able to convert a rating from a ‘BB+’ to an ‘A’, therefore reducing the level of risk and the amount of capital required.
S&P also expects capital markets to expand to help meet the world’s growing infrastructure requirements. Despite continued competition from bank lenders, global project finance bonds increased by 22% in 2016 compared to the year before. Should potential Basel IV regulation further constrain banks’ ability to lend at low rates, S&P expects capital markets will continue to fill the gap.