Despite the credit crunch, he says there is no shortage of opportunity. “In general terms, people will say the financial markets are in one of their most challenging periods ever. But the infrastructure and PFI/PPP sector is challenging for a slightly different reason. Intrinsically, the risks that we are undertaking by funding such projects have not changed. Infrastructure remains attractive because projects are relatively low-risk due to their long-term, predictable revenues. So unlike commercial property, when people are worried about a downturn, the infrastructure sector remains robust on a global basis.”
The problem, he says, is that it is hard to raise the money for investment. “I am struggling with a very attractive sector, but unfortunately the ability of banks to raise enough money to fund the opportunity has become more limited due to current volatility in the world’s financial markets. It’s like being in a sweet shop and not having enough pocket money.”
Nonetheless, Mr Cohen is not too concerned. “The credit risk inherent in the sector has not been affected, and it is unlikely to deteriorate because underlying many of these projects are governments paying for these facilities.”
The Bank of Scotland infrastructure team recently led a group of banks to arrange £2.2 billion of debt finance to update the RAF refuelling-aircraft fleet under a Ministry of Defence PFI project — a particular achievement given the nervousness in the markets, he says.
He acknowledges that investor confidence in banking has been severely dented by banks’ exposure to sub-prime debts and the wider knock-on effects. “Until this is quantified and more confidence is reached on the projected profits of financial institutions, share prices will continue to be volatile.”
Another reason for recent share volatility, he says, is the opportunistic behaviour of investors who “short” shares in companies with rights issues. Short-sellers borrow company stock owned by another investor, then sell the shares, hoping the price will drop. They then buy back the shares at a lower price.
How easy is it to raise debt and equity in today’s market? “There is a top tier of banks that we count ourselves in that earn fees by arranging and structuring the financing. For instance, if there’s a £2 billion deal, you get four to six banks together and they will take between £0.4 and £0.5 billion each on to their balance sheets. The next thing they do is syndicate that debt at the second tier down, and they will try and distribute each of their positions down to about £50 million by selling the debt into a much wider banking market — banks that are not equipped to structure big deals but are happy to take smaller exposures for the interest income.
“Because of the credit crunch, the appetite in the second tier of banks has become constricted, making it harder for banks like us to want to underwrite major deals because of the risk of getting stuck with more assets, which for us is not an efficient use of the bank’s capital. So our distribution at the moment has become a bit more limited.
“I have seen some signs that this situation is easing, and I think the first sector that will come back will be infrastructure.
“The PFI for the M25 widening is a multi-billion-pound project due to come to market for financing in a couple of months. So how liquid the markets will be by then will get tested.”
He is particularly positive about the future. “The market could expand massively over the next ten years. The US hasn’t really started, Canada has barely started, South America and Africa has hardly begun, the Far East, China and India are just beginning.”
Mr Cohen currently has teams in Madrid, Frankfurt, Paris and Amsterdam. “It’s not just a UK thing any more.”
Israel is also currently using PFI to finance light-rail and road schemes underway in Tel Aviv.
“Populations around the globe are demanding infrastructure developments. I do sleep well at night. It is nice to be a part of an infrastructure revolution involving the very foundations on which economies and public services are based.”
Mr Cohen lives in North London and is a member of Mill Hill United Synagogue. He is married with two sons.
