Over the last few years, the financing market has been particularly active in resources transactions – commodity price volatility, changes in tolerance for exposure to certain asset or commodity classes and a raft of entrants into the Australian resources debt market, have combined to dramatically impact the availability, pricing and administration of debt financing for resources projects and led to more innovative forms of equity.
It’s possible to distil some “key trends” from this activity.
1. Impact of ESG
The impact of ESG considerations on the debt financing of resources projects is considerable and takes a number of different forms. The most obvious impact is the availability, or not, of debt financing for certain types of resources projects – notably, coal. Some lenders have a blanket ban on financing coal projects, others look to distinguish between types of coal projects (ie. thermal vs coking or metallurgical coal) and yet others will participate on a “portfolio” basis (ie. if it won’t exceed a certain proportion of their loan book). Yet others may look for coal projects, on the basis that they have a form of competitive advantage by virtue of being ready, willing and able to finance them.
Interestingly, recently some non-bank lenders who may have avoided coal are taking a renewed interest with a mandate of assisting in the progress to a cleaner market – ie. they may be able to finance a project if there is some sort of pathway to green (or “green-er”), such as exploring clean(er) coal, carbon captures, co-location of a clean energy or co-generation project, etc.
We also see ESG considerations playing out in pricing and the administration of loans, as described below.
2. Pricing
Both pricing of the loan and pricing of the underlying commodity are relevant here.
Pricing volatility of underlying commodities has led to a greater focus (when compared to what might have been the case over the preceding years) from financiers on hedging arrangements, offtake arrangements and price forecasting mechanisms as a means of de-risking the lend – often adding complexity (and cost) into the financing arrangements as borrowers need to “jump through” those hoops and work through what might be some difficult legal issues. As an example, a group of secured lenders might require a certain amount of commodity price hedging to be undertaken – and the hedge counterparties may require this to be secured. This poses interesting questions for the negotiation of intercreditor and voting mechanics – eg the hedge counterparties’ exposure under the commodity price hedge may dwarf the debt exposure and leave the lenders without an ability to control the outcome of secured creditor votes.
Pricing of the loan has been an interesting space – we’ve seen very large differentials in prices that various lenders look to apply to the same loan, for example, as a result of the internal risk rating they might put on factors such as ESG considerations While it started off as quite a niche product we’re seeing more sustainability-linked loans, and in a more diverse borrower pool – by the back end of 2021 we were even seeing these being implemented for coal ports and miners.
3. Administration of loans
The pricing volatility and ESG considerations discussed above have also impacted the way in which loans are administered by borrowers. We’ve seen borrowers look to avoid going to lenders for consents or waivers, and are carefully planning their refinancing strategies, having regard to certain lenders.
An example of this would be when a lender (or a group of lenders) make it known to a borrower that they’re looking to exit a loan at the next opportunity. Unless it’s a project which will easily be able to attract an alternative pool of lenders, the borrower will be incentivised to not bring forward the exit opportunity for that lender and refinance the project’s debt financing.
4. Security
A number of alternative investment models (such as metals streaming) are increasingly popular in the market – and many of the players (or bidders in a competitive environment) such as those taking a royalty or metals stream over a project are looking to take security to de-risk what might be a newer (and consequently perceived as a riskier) form of investment for them.
Even absent any concerns around the use of a novel investment structure, we’re increasingly seeing complex security situations at project level – there may be lending, royalty or streaming arrangements, receivables financings, trailing payments from sale processes, prepay transactions, hedging … and some or all of these might be secured. The reasons for this increasing complexity are unclear – it may partially result from an increased counterparty focus on risk in the current environment and may also have something to do with increasing transactional turnover of established assets which come with their own “baggage” (ie perpetual secured royalties, or trailing acquisition payments).
The result of this is that the priority and intercreditor arrangements which the counterparties then need to agree to are likewise increasingly complex, and are taking significant periods of time to negotiate – potentially constraining a project-owner’s ability to complete transactions in a timely manner.
The inclusion of security can also bring Australia’s FIRB regime into play, which again adds to the time and cost of putting these arrangements in place.
