7. Debt Funding Options for Business or Project Finance
Business finance and project finance structures require a combination of debt and equity funding. Outlined below are the various sources of debt funding available under these structures.
7.1 Private debt
Justification for private sector investment has been outlined in section 2 (above).
While there are a variety of options for raising private debt in the marketplace, the nature of the irrigation project will result in the available options being somewhat limited. Possible providers of debt have been outlined below.
7.1.1 Bank Debt
Bank debt will constitute "senior debt", meaning it is fully secured lending with a priority for repayment and as a result will carry the lowest cost. As the amount and term of bank financing increase, so will the cost. This is a result of an increased risk profile of the lender through uncertainty created around debt servicing and ultimate repayment.
The level of debt (as a percentage of the project value), the permissible term, and the cost of the debt will vary among the banks. We recommend several banks be invited to offer terms for lending into the project to ensure the best deal possible is achieved.
7.1.2 Institutional Debt
There are a number of institutional fund managers that may have an interest in investing in long-term infrastructure assets such as water enhancement. The desire of these companies will be to match their required superannuation annuity cash flows with a long-term investment that can provide a relatively certain level of cash flows.
It is the long-term nature of water enhancement schemes that will attract institutional investment. This form of debt has not been accessed by water enhancement schemes in New Zealand in the past and therefore there would need to be an intense education and marketing process to attract this investment. As a precedent, Australian superannuation schemes and insurance companies have invested significant levels of funds into long-term infrastructure projects and consider water enhancement developments to be a very good investment provided that the start-up risks have been overcome.
Essentially the private infrastructure (particularly irrigation infrastructure) investment market is relatively new to New Zealand and therefore is approached with caution. Large institutional investors (like insurance companies) are restricted as to what they are able to invest in, based on industry segments, geographic locations, recognised credit ratings etc. Given that there is no significant track record for private irrigation investment (outside of water users) this market may take a while to mature in New Zealand.
Institutional investors are likely to take a project finance focus, relying heavily on cash flow certainty rather than strong security. A scheme will therefore need to demonstrate very high reliability of revenue and strict management of scheme costs in-order to interest these investors.
7.1.3 Public Debt
Public debt refers to issues of debt to the general public by way of bonds, capital notes or debentures with a fixed rate of return. Private investors who take up these issues are generally driven by returns, with less of a focus than banks on other terms and conditions, including security.
Given that the market has not yet seen a large-scale irrigation project it is unlikely that this investment will be attractive to the public without certainty about the quality of returns and long-term value of the project. There are a variety of investment options competing for private investors in the market, and the structure and returns would have to be set appropriately to attract this form of financing.
It is not likely that this form of debt would be as applicable to water enhancement schemes.
7.1.4 Offshore Capital Markets Debt
Offshore debt markets in Europe and the USA can offer issuers a longer term than is generally available in the Australasian markets. The offshore markets are usually US$ denominated with minimum deal size considered to be US$50m for Europe and US$100m is normal in the US.
The Asian debt market is providing attractive borrowing rates, but are not fixing rates for long term lending at present. The inter-bank interest rates in Asia are currently around 0 percent, therefore funds are available to borrow at a 2 percent -3 percent interest rate. However, as these rates are in local Asian currency and not able to be fixed for long periods, access to debt through this market is not applicable for water enhancement schemes in New Zealand.
Providers of finance in these markets will usually look for a recognised company name with a reputation in the market. This will make access to these funds difficult for water enhancement developments.
It is not likely that this form of debt would be as applicable to water enhancement schemes.
7.2 Government (Public) debt
Access to Government debt is clearly positive for irrigation developments. Government provides the corner stone investment role, and is likely to accept lower debt finance rates with more relaxed repayment terms given the non-financial benefits that irrigation brings to the region and country. Government participation brings credibility to an investment and generally strengthens the schemes ability to raise other debt and/or equity funds from the private market.
Government (local and Central) investment criteria and prioritisation in relation to debt funding has been outlined in Study 3 – Role of Central Government and Study 4 – Role of Local Government.
See 8.2.3 below for an assessment of the effectiveness of Government Debt vs Equity.
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