Analysis: the scramble to access private credit finance for infrastructure

One of the financing issues facing UK water companies is that they are not only competing with their energy network peers for debt funding, but also with rivals across Europe. The switch by private credit fund managers to finance infrastructure initiatives is set to gather pace in Europe over the next three years, new Nordic Trustee research with executives in the sector has showed. Nordic Trustee is part of global capital markets services provider Ocorian.

Nearly four out five (78%) questioned expect the trend towards funding European infrastructure projects to increase, with 21% predicting a substantial increase.

The study with executives across the UK and Ireland, Germany, Switzerland, Benelux, the Nordics and Eastern Europe found some concerns about whether there is sufficient private debt capital available for infrastructure lending in the next three to five years. Although 72% believe there is enough private debt capital available, nearly a quarter (23%) questioned believe additional lending capacity is needed to meet expected demand for debt financing in European infrastructure investments, while another 5% were unsure.

Around 87% chose construction financing as one of their three loan types facing the highest demand, ahead of 76% choosing senior loans as one of their top three. Around 56% selected junior loans and more than half (51%) picked mezzanine financing as one of their top three. About 10% said all loan types were experiencing high demand.

The joint RAPID team (Ofwat, the Environment Agency and the Drinking Water Inspectorate) has ambition to fund £2.15bn of new assets to increase national resilience. These assets will be competing for debt finance not only from the UK regulated companies in AMP9 and beyond but from projects in Europe.

With a new private-public model as yet not fully detailed, and public dissatisfaction with the industry, UK non-regulated water infrastructure may be priced at a premium to other infrastructure projects. The RAPID team hope that the weighted cost of capital associated with a major project may be lower than that of the procuring water company, but there may be a supply/demand premium across Europe, especially given that Direct Procurement for Customers project debt re-financing gains are intended to be shared with customers.