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Project finance squeeze will drive M&A activity

31 October 2008

A significant tightening in the availability of finance for major projects will see many smaller energy and resources companies snapped up around the Asia Pacific.

Allens Arthur Robinson (Allens) partner, and head of the firm's Project Finance group, Phillip Cornwell said the international credit crisis and fears of a worldwide economic downturn had reduced the number of banks actively participating in the project finance market, and the quantum of debt each was willing to underwrite.

This, coupled with the poor state of debt and equity capital markets, means that junior players are facing huge difficulties in raising finance to progress new projects, leaving them vulnerable to takeover. The same factors will pose challenges, at least in the short term, for the private financing of large infrastructure projects.

'The good news is that the first nine months of 2008 has seen project finance deal volumes actually increase by 16 per cent, according to global research undertaken by Dealogic,' said Mr Cornwell.

'However, this quarter is looking bleak as a result of the credit crisis deepening, the severe drop in commodity prices and the uncertain prospects for the world economy.

'Smaller energy and resources companies in particular will struggle to finance new projects and may become M&A targets,' said Mr Cornwell.

He cited the recent acquisition of Australian-based Queensland Gas by global giant British Gas as the start of this trend.

While expecting a general slowdown, Mr Cornwell said there would still be areas of project finance activity.

Banks, especially the Australian banks, were still lending to well-structured deals, and specialist private equity firms were enjoying a flood of opportunities to provide mezzanine or 'last resort' funding. There would be an increase in social infrastructure Public Private Partnerships (PPPs) for new hospitals and schools, which are of a manageable size for private bank finance. The pending release of details of the Federal Government's extension of the mandatory renewable energy target (MRET) to 20 per cent by 2020 will give renewable energy projects a huge boost, with further impetus to come from the roll-out and ramp up of the emissions trading scheme.

Allens has again dominated the Australasian project finance legal adviser tables, according to the latest Dealogic Project Finance Legal Advisor Review.

Allens led all firms in dollar amount and volume of project finance deals in Australasia for the year to date, with 25 deals valued at US$6.2 billion. In the Asia Pacific, Allens placed second, behind a Chinese firm with one large deal credit.

The firm's Australasian market share of 34.7 per cent was almost as large as the combined market share of the second- and third-placed firms. Allens again ranked in the top 10 for the worldwide tables (and fifth for global PPP/PFI transactions).

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Notes for editors.

Allens Arthur Robinson has staff in 14 cities and eight countries across the Asia Pacific.