Banking on Finance

When the new Liberal government made a commitment of $120 billion over 10 years in new federal infrastructure funding commitments in the 2016 federal budget, you might have thought that would be a game changer for infrastructure finance. You’d be wrong. It’s a slate of large transit projects right across Canada that is changing the way such infrastructure developments are financed. Projects like new light rail transit lines in Greater Vancouver, Ottawa and Montréal among ...
Banking on Finance
When the new Liberal government made a commitment of $120 billion over 10 years in new federal infrastructure funding commitments in the 2016 federal budget, you might have thought that would be a game changer for infrastructure finance. You’d be wrong.

It’s a slate of large transit projects right across Canada that is changing the way such infrastructure developments are financed.

Projects like new light rail transit lines in Greater Vancouver, Ottawa and Montréal among others cost many billions of dollars each.

Canadian banks have never been interested in the long end of such big projects, which require massive financing commitments, often for 25 or 30 years, traditionally yielding to their Japanese and European counterparts.

But there are new players in town: Large public pension funds and broadly marketed and rated bonds.

“We’re seeing fewer and fewer bank deals and on larger projects almost exclusively bond financing,” says Ilan Dunsky, National Co-chair of the Infrastructure and PPP group at Dentons Canada in Montréal.

“Even the European and Japanese banks who were interested in these kinds of Canadian projects are being squeezed out by bond financing because the interest rates you can get on a bond are so attractive. So the number of projects that are financed by bond issuances and also the proportion of each project that is financed by bonds is rising.”

But that kind of structure may have clouds on the horizon.

Ian Bendell, a foreign legal consultant working with the global projects, infrastructure and public-private partnerships group at DLA Piper (Canada) LLP, says there are “points of contention” between the rating agencies that rate the bonds and the way long-term investors view the same projects.

“That’s certainly something we’ve been seeing more of, and that could be an interesting area to watch over the next year,” he says. “What seems to be happening is rating agencies have looked at a structure and taken a view that it should be rated at a particular level, and the long-term investors are looking at the same structure and asking whether that rating is not too harsh.

“I think we’re going to have to be a little careful about the view long-term investors take as opposed to the view the rating agencies are taking.”

How will the market know if the issue flares up into more than a few small skirmishes? One dead giveaway: investors will turn their backs on an underwritten bond, he says.

“In those circumstances the underwriters are left holding the bonds, which, in the Canadian market, is not what the underwriters generally want to do,” says Bendell, who works out of the firm’s Toronto office.

“What that will mean is either the structuring will have to get tighter so the rating is agreed by all three at the appropriate level or, alternatively, you’re going to find the spreads the underwriters are creating are going to move out because they don’t want to be left holding the baby.”

Not every deal is in the $5-billion range; many infrastructure deals that involve green energy, public housing or climate change are significantly smaller.

Carol Pennycook, a partner in the Toronto office of Davies Ward Phillips & Vineberg LLP, says that, while the infrastructure bond market remains robust, the Japanese banks in particular have begun to show up again on these kinds of projects “in in a big way.

“Bank of Tokyo-Mitsubishi UFJ have been very active in renewable energy like wind and solar, and are becoming more active in Canada. I think they’re doing some P3 financing as well. Sumitomo Mitsui has been active in both those areas. They were one of the short-term lenders on the bank side on the Edmonton Valley Line [light rail].”

Then there’s the China factor. “The Chinese banks are certainly setting up a foothold here,” says Pennycook. “I just haven’t seen them yet in the infrastructure arena, but I think there are now some Chinese state-owned entities looking at trying their hand on the design and construction side. They haven’t really hit the market here yet, but I know that they’re looking at it.

“One would expect that if they do come in they’ll need to partner up with local contractors first of all and secondly they would probably bring banking relationships with them, and then maybe you’d see the Chinese banks there. Once people started in that end, they’d be more likely to expand.”

Bendell says large US capital pools are also becoming more interested in the bigger project sizes, and Canadian project companies are increasingly seeing US investors as a way of widening the pool of long-term funds, “and are designing instruments that adhere to US securities regulations and allows them to sell into the United States.

“In some cases, people are not as familiar with the infrastructure market in Canada, but I think it will only take a number of deals where these types of investors are getting their cash in order for it to be perceived as a relatively liquid market for investment in Canadian infrastructure.”


In Canada, the long-term debt component of financing large P3-type projects these days is usually done by private placements to life insurance companies and other large capital pools that use them to offset long-term liabilities.

Big pools of capital like big projects. It’s that simple.

They haven’t found projects under $1 billion interesting, with the due diligence, legal and other professional work eating up too much of the potential return.

“The big pension funds in Canada, the big pools of cash, the one complaint they’ve had up to now is that there are few very large projects in Canada,” says Erik Richer La Flèche, who co-heads the Infrastructure Group at Stikeman Elliott LLP in Montréal.

While all the larger transit-related projects are attracting attention, one in particular is seen as a serious potential game changer. It is the Caisse de dépôt et placement du Q
uébec effectively acting as the project developer and issuer on Montréal’s $5.5-billion light rail network.

Richer La Flèche calls it a new model of “public-public” partnership for a government-initiated project.

Normally, the role Q
uébec’s pension fund is taking would be assumed by the private entity that is going to build and operate the highway or rail network.

The Caisse de dépôt – created by an Act of Q
uébec’s National Assembly – is effectively cutting out the middle man. “In something like this, the Caisse provides a buffer for the government in terms of political considerations — local content, tariffs, location, lobbying and that kind of thing.”

The Caisse has said it is willing to assume $3 billion of the estimated total cost but was looking to Ottawa and Q
uébec City to kick in the balance.

Richer La Flèche says having a behemoth like the Caisse put up the money needed to become a preferred proponent (or bidder) – a process that often requires private entities to get and hold hundreds of millions of dollars in financing for six to eight weeks while the government makes its choice – is a boon for the private sector because it frees them up to work on more projects.

“Most design-build contractors would prefer to leave the financing to the owner. It impacts their ability to borrow, so it restricts the number of projects they can bid on and work on.”

Ehren Cory, Divisional President, Project Delivery at Infrastructure Ontario, says agencies like his across the country “will be watching [the Caisse] with interest.

“We’re always looking at what other jurisdictions are doing, whether Q uébec or British Columbia or other countries, because we have a shared interest in continuing to innovate around these large transit projects.”


Dunsky says one of the more interesting trends in infrastructure financing is coming from Australia. It’s called asset recycling and it’s a form of privatization — with a catch.

“What the federal government there has done is establish a program whereby they essentially offer funds to the state government if the state governments will sell, in whole or in part, infrastructure to the private sector. If they use the money from the sale to develop new infrastructure as opposed to just putting it into general revenues, then the federal government makes a contribution towards the new infrastructure as well.

“I know the federal government of Canada is looking at that right now. Obviously we don’t know whether they’re going to adopt it and, if they do, how it would work but a program like that essentially unlocks tens of billions of dollars of value to be used for infrastructure financing. To an extent it’s not new because federal and provincial governments have privatized infrastructure assets before but the idea of recycling the money into other infrastructure projects instead of just putting it into general revenue is interesting.”

The other thing everyone in the area has been waiting to see is the promised federal government infrastructure bank.

In his Mandate Letter to Amarjeet Sohi, the new Minister of Infrastructure and Communities, setting out the new Liberal government’s top priorities, Prime Minister Justin Trudeau wrote: “Work with the Minister of Finance to establish the Canada Infrastructure Bank to provide low-cost financing (including loan guarantees) for new municipal infrastructure projects in our priority investment areas.

“This new institution will work in partnership with other orders of governments and Canada’s financial community, so that the federal government can use its strong credit rating and lending authority to make it easier – and more affordable – for municipalities to finance the broad range of infrastructure projects their communities need.

“This should include preparing for the launch of a new Canadian Green Bond that can enable additional investments when a lack of capital represents a barrier to projects.”

As for the government’s $120-billion commitment to fund new federal infrastructure, none of the lawyers or provincial infrastructure officials contacted said they had yet been given any understanding of exactly how those numbers break down.