This was the first such co-investment tie-up between an insurer and a bank making use of a bespoke, multi-transaction special-purpose vehicle; apart from acting as co-investor in infrastructure project lending, Natixis also acts as custodian, account bank and servicer for a fonds de titrisation vehicle in which Ageas is the sole investor. Ageas intends to commit €2bn to infrastructure debt by 2015.
Ageas completed its first transactions by early 2013, financing transport and social sector projects totalling €134m. One of these was the first public-private partnership transaction in France involving an institutional investor.
By the end of 2013, Natixis had also signed a second investment partner, French insurance company CNP Assurances, which is also targeting a portfolio of up to €2bn within three years.
For a bank like Natixis with expertise in infrastructure, the need is simple: regulation including Basel III is restricting the ability to lend – it is rich in expertise but starved of liquidity. Institutional investors, on the other hand, are liquidity rich but mostly lack the expertise to take on such direct investments alone.
Prospective infrastructure debt investors have broadly faced two alternatives – large investors hire a lending team to invest directly, while smaller ones invest in a fund structure through an asset manager. The partnership approach represents a third route to the market – at least for a small group of investors.
“Natixis is very active in infrastructure and has been for more than 20 years, acting as financial adviser, arranger and as one of the lead players,” says Anne-Christine Champion, global head of infrastructure and projects in the aircraft, energy and infrastructure finance division at the bank. “Looking at structural trends in the market, we decided in 2012 to support and drive the market by building an infrastructure debt platform and opening access to institutional investors. When you look at the global infrastructure market you see that it is a 90% debt market, mostly financed by banks, with the expertise and knowledge staying within the banks. We have developed an innovative approach where the bank is bringing origination and structuring capacity and the investor brings greater liquidity.”
As well as sourcing the deal pipeline, Natixis is offering its project finance expertise, including knowledge in areas such as preparation of the final documentation, negotiation of sub-contracts, risk analysis and oversight and handling of potential waivers or restructuring.
The bank has around 100 staff working on infrastructure, including an origination team with 10 desks worldwide and further teams for portfolio monitoring. “We are sharing our banking infrastructure in terms of human resources and other specific processes to ensure investors can benefit,” adds Champion.
Ageas and CNP have different investment criteria, which means the bank cannot always offer the same proposition to both. Natixis originates and presents transactions according to pre-determined criteria in terms of geography, sector and currency, and after conducting its own credit assessment. Having seen the proposal, the two insurers make a decision, looking at the merits of each case, on whether to invest based on their own internal analysis.
If a co-investment is undertaken, Natixis retains a portion of the tranche on its own balance sheet to help ensure alignment of interest.
“The partners do not delegate the decision to anybody, they take it in house,” notes Laurent Belouze head of conduits and servicing in aircraft, energy and infrastructure finance at Natixis. “It was important to them to be able to retain the final decision. We want to provide them a turnkey solution for their situation, needs and constraints over the long term and so far we are the only one to do this,” he adds.
“Our target would be to get Ageas and CNP with us on the same transaction because we can underwrite a large portion of the transaction and make it easier for sponsors to have one single point of discussion, negotiation and management,” says Champion. “That is really very valuable for our sponsors.”
The bank provides full information to the investors, subject to disclosure protections, but a further comfort factor resides in the approval needed for a co-investment. Natixis’ own credit committee must approve each loan before the partners can co-invest, and there is no packaging of transactions or taking them to market.
Unlike banks, which favour short-term transactions, institutional investors want long-term investments and they don’t want to be refinanced – needs that Natixis has tried to service.
“A very important element of the partnership is what we call reverse structuring,” continues Belouze. “We are in a banking market and we structure transactions the way banks like them, which means variable rates and short term if possible. Institutional investors have a different approach; they want a recurring long-term yield on their investments so they can finance for the long term and they want a fixed rate, so we try to structure a specific long-term tranche for institutional investors with fixed rates.”
Investors also expect additional yield to cover refinancing risk. “This is not easy for the team in charge of the negotiation because you bring additional aspects that our sponsors were not familiar with and the market has not previously been structured in this way for us,” adds Belouze. “We are also trying to improve the views of the other participants regarding institutional investors. They are not going to be there on your back but they do have specific requirements and we have to tackle those issues with them. We are making a link between two worlds – the sponsors on the one side and the institutional investors on the other.”
Natixis does not intend, at this stage, to seek a further large-scale partner like Ageas or CNP Assurances. But it will seek co-investors for specific euro-denominated transactions, as well as partners for dollar and euro investments for infrastructure in Asia or and North America.
In terms of asset finance, Natixis is looking to expand its activity with co-investors in aircraft leases and export finance, and is discussing dollar-based transactions with investors. This market is shorter term than infrastructure and is still a bank dominated market. “When you see institutional investors interested in infrastructure, there is no reason why they should not be interested in aircraft. Once again, we are at the beginning of the story of the asset class,” notes Belouze.
A key focus will be export credit agency (ECA) guarantees for aircraft financing, both with 100% and 95% guarantees. The former is a low-risk and low-yield market, but it is liquid and accessible via loans and bonds.
The market for 95% ECA guarantees is currently mostly restricted to banks but Natixis is lobbying to open this segment to institutional investors, viewing it as a halfway house between pure infrastructure and financing with a 100% ECA guarantee. “The recovery is very good at 95% with 5% residual risk and on top of that you have a little pickup because you have 5% of risk.
We are also working on the regulatory aspect with the ECAs, as some of them – such as the French, Belgian, German agencies – do not allow institutional investors to benefit directly from this guarantee. They want banks because they analyse the transaction and take the 5% residual risk and the ECAs don’t think institutional investors have the capacity for risk analysis. We are working on this but it takes time.”
There is clearly very limited capacity for this kind of innovative partnership between banks and institutional investors, although there have been examples of collaboration in other areas of lending, such as the property debt tie-up between AXA Real Estate and the Norwegian Government Pension Fund Global. One large infrastructure debt investor, the insurer Allianz, seeks co-investors through its asset management arm, Allianz Global Investors.
“I am 100% convinced that asset managers are going to take a big part in our world and they want to intermediate between institutional investors and originating banks,” concludes Belouze. “The key barrier to that today is the pricing of asset managers. Asset managers are only going to be there if they find other processes and solutions to reduce costs. Otherwise it’s not going to work.”