Key trends in infrastructure and energy finance

Four key takeaways

1. Infrastructure continues to broaden as an asset class

The guidance recognises that infrastructure now firmly encompasses digital infrastructure assets such as data centres, fibre networks and digital transmission assets alongside more traditional transport, social infrastructure and energy assets. It also highlights the growing convergence between sectors, particularly where power generation, battery storage and data infrastructure are co-located or co-dependent.

For both borrowers and lenders, this reinforces the importance of adopting financing structures and due diligence which reflect the unique characteristics of each asset rather than applying a standardised approach.

2. Sponsors increasingly demand flexibility

The guidance highlights that much of the convergence of infrastructure and leveraged finance has been sponsor driven. Sponsors increasingly seek the flexibility typically seen in leveraged finance and a number of features have now become commonplace in sponsor-backed infrastructure transactions.

One example of those sponsor demands that we see is on scalability. Infrastructure financings are now increasingly expected to support future growth, whether through bolt-on acquisitions, portfolio expansion, additional development phases or new investment opportunities. This naturally brings in features common in the leverage market such as incremental facilities and “permitted” carve outs in the covenant package.

Negotiations at term sheet stage invariably include a focus from sponsors on operational flexibility, for example pushing back on the traditional project finance lender controls such as blanket restrictions around entry into new contracts or amendments to contracts, or seeking to eliminate detailed forecasting and budgeting mechanics and controlled bank account structures. Reducing the ongoing reporting burden is also often a key focus.

 3. Market/demand risk is key to financing options

The note draws a distinction between “Core”, “Core+” and “Core++” infrastructure assets, based on the level of market/demand risk. The guidance emphasises that two assets in the same asset class may attract very different financing terms depending on factors such as revenue certainty, development status and exposure to market risk. A fully contracted operational asset with an investment grade offtaker will be able to seek a very different financing package to an asset with no contracted revenue stream.

4. Infrastructure remains a distinct financing product

Despite convergence with other parts of the debt market, the note makes clear that infrastructure finance retains a number of characteristics. Key among those is that it remains limited recourse or no recourse to the sponsors and tends to sit at the lower risk end of the market. Typically it will include maintenance financial covenants (although the nature of the covenants will vary depending on the nature of the asset being financed), distribution mechanics to permit releases to equity, lock-up cash sweep mechanisms, bespoke “permitted” regimes, mandatory prepayment on change of control other than to “acceptable investors” and a focus on preserving the stability of the operational asset or portfolio of assets and its cashflows. The guidance also notes that enforcement strategies are often centred on preserving businesses as going concerns rather than breaking up underlying assets.

What this means for market participants

The guidance is a useful summary of features we are currently seeing in a market that continues to develop rapidly. As energy transition projects, digital infrastructure assets and essential service businesses continue to attract increasing levels of investment, financing structures are becoming more diverse and need to be tailored to the specific characteristics of the relevant assets.

Choosing the most appropriate funding solution requires careful consideration of the project’s risk profile, contracting and revenue strategy, ownership structure, growth plans and long-term capital requirements.

How we can help with your infrastructure and energy finance

Our team advises lenders, sponsors, developers, funds and investors across the full range of financing structures, including project finance, infrastructure finance, acquisition finance, leveraged finance, refinancings, holdco financings and multi-source debt financings.

Together with our in-depth knowledge of the legal and commercial issues surrounding energy and infrastructure projects, including grid connection arrangements, land rights, planning strategy, construction contracts, revenue and offtake strategy and regulatory issues, we help clients navigate an increasingly complex landscape and identify financing solutions that support their commercial objectives.

If you would like to discuss any aspect of the new LMA guidance or explore financing options for a particular asset, project or portfolio, please get in touch with Laura or another member of the team.