The Debt Selling Game

By Brendan Malkin

More than ever, the fortunes of project finance lenders are in the hands of powerful forces they have little or no control over. Their ability to lend and retain large portfolios are restricted by the continuing high cost of wholesale debt, while Basel III is requiring them to significantly increase the amount of capital they retain in reserve.

A combination of these factors, as well as others, is helping to drive a large-scale sale of project finance debt. A number of sales have already started, the most well known being the offloading by Banco Espirito Santo (BES) of its entire project financed portfolio. Others are also expected to take place over the coming months, although there is uncertainty over whether they will ever actually get off the ground.

The success of all of them will depend not just on the existence of a general appetite for these types of loans, which include a mix of low priced debt as well as the more expensive debt signed over the last two years, but also on the willingness by banks to accept discounts. The experience so far, however, for both sellers and buyers has been less than entirely satisfactory.

BES, which launched a programme to sell off its project finance loan portfolio towards the end of last year, is a case in point. It has stated publicly that it wants to deleverage due to the high cost of funding in the wholesale markets. Doing so, however, has been easier said than done.

It is widely held that some of BES’ non-low priced debt has been sold to some of the other 150 banks in Europe that specialise in project finance. Infrastructure funds, including Macquarie, are also rumoured to have acquired some of this debt.

However, its low priced debt has fared less well. It is generally accepted by City bankers that towards the end of last year a number of investment banks, including Merrill Lynch, Credit Suisse and UBS, set themselves up as unofficial brokers in order to facilitate the sale of this debt, priced at around 60bps, to a number of hedge funds. In the end though, the deal went sour. One person close to the sale recalled: “Hedge funds put in bids far below the price being asked for. BES rejected them.”

Meanwhile, BES continues in its efforts to sell off the remainder of its project finance portfolio. The management board of BES, which declined to comment, is understood to have briefed three of its syndications desks, including one in London run by Giorgio Scatigna-Gianfagna, to close the sale by the end of this month. Few believe it will take place by then.

So, what has gone wrong?

Part of the problem seems to have been around a failure by BES and potential buyers of its low priced debt to agree on discounts on each sale.

One banker, who said he looked at BES’ low price debt but in the end decided against buying it, commented: “We didn’t find a meeting of minds in terms of the price we wanted to pay, and price they were prepared to sell at. The discounts simply weren’t sufficient.” A similar result is understood to have happened when the hedge funds submitted bids. All this is in contrast to the acquisition of debt signed over the last two years. “The market is hungry for near par assets; people don’t want to buy discounted assets,” said one banker.

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