What is Bankability?

I’m hoping to embark on a series of writing that will help the university students and young graduates appreciate the infrastructure industry better. I know this is likely the beginning but I’m not sure when it will end or how frequently I’ll be writing. For now, I thought I just want to get started and eventually when there is critical mass, I’ll be putting it up on a separate website.

For consumers, when we apply for credit cards, the bank taking in the application wants to know our income, our employer, age, and will probably scrub our current track records for payment on our other cards, as well as any outstanding debt we have. For businesses, the process involved in loan applications is somewhat similar. Banks look at the years it has been established, the revenue/sales track records, the profitability of the firm and or sometimes they are financing based on the invoices – payments that the firm will be receiving from its customer for goods sold.

And then there’s infrastructure projects; they are not yet built, there’s no cashflow or payments made to the infrastructure, sometimes the land is not even acquired yet (there’s no one providing funds to acquire the land!). The willingness of a well-established financial institution to lend money to the project at reasonable interest rates (ie. ‘bankability’) will depend a lot on factors that surround the projects which gives good indication of the ability of the project to repay its debt. Like consumer credit, the more data the banks have, about both projects of the type in general, and also specific data about the project to be financed, would help give them a better sense to assess if they should lend to the project.

So what kind of data? I’ll distinguish between the availability of data, and the outcome of the assessment on the data available. The banks need data on the reliability of the sponsors/developers (essentially the equity owners of the project), the engineering-procurement-construction (EPC) firms involved, the government or customer of the project (ie. the one who will be paying for the services the infrastructure provides), as well as the underlying project involved. For each of the entities involved:

• Previous payment/financial performance – in the form of financial statements, records, etc.
• For government, often some kind of sovereign rating
• Track records in project execution (especially in terms of the construction in the case of EPC firms, and operating experience for the developer or whoever they might be appointing to operate the project)

Then for the underlying project, the sources of data that will allow the banks to make the assessment would be:

• All the contracts involved in the project
• Feasibility studies involving site survey results, data – independent studies verifying that the proposal is feasible, technical solutions can deliver expected results, etc.
• Any documentary evidence of support by governments or other development financial institutions towards the project.

In essence, these things are basically like the payslip or appointment letter from your employer which you submit for your credit card application. They give proof that the project is able to be put together and generate the kind of cashflow worthy of the loan that it will be taking out. There will also be sophisticated financial models that are shared across the developers and the banks in order to work out transparently what is the cashflow expected from the project across its lifetime and how these cashflows will be divided amongst the various stakeholders.

Through the information, the bank determines how stable the cashflow is, the level of comfort they have with the creditworthiness of the various parties, and then work out the pricing (ie. interest rates) on the loan, which helps to update the financial models, and provide more clarity to all the parties involved on how the returns from the project are shared. The assessment of risks by the bank (which impacts on pricing and whether they would be interested to finance the project at all) will be based upon their internal due diligence on the various parties involved in the project, as well as the feasibility study, and the set of contracts underlying the project. It often depend critically on the government involvement in the project and how they are involved. Major project finance deals are often achieved with government providing a guarantee on the income stream of the project conditional on the performance of the project based on pre-agreed indicators. Once the bank is satisfied that the operators and developer is able to perform in accordance to the contract, they shift their attention towards the creditworthiness of the government who have promised to pay.

As a result of these complexities, infrastructure transactions themselves are not only big in terms of the investment but they do require big teams to put the transactions together whether it is on the developer side, the financial institutions or the consultancy teams. These teams are all combining various disciplines including accounting, finance, engineering, general management, project management, legal, etc. To that extent, we do think that the industry is a good generator of job opportunities. The challenge is that these projects are typically have activities in starts and stops (extreme busyness in one camp or another in different points of time). The skills required across the sector is quite wide-ranging though the topic tend to be more narrow and focused.

This article is part of a series I’m working on to make topics in infrastructure a little more accessible to students and people from outside the industry who might want to get involved.