An increasingly prevalent feature of the commercial debt markets for infrastructure is a move by banks away from offering long-term loans (20+ years) to offering mini perm products.
The main feature of these mini perms is that the loan period will be for a shorter term (say, 7 to 10 years), often to cover a construction period and a short period of operations. There are two products (hard and soft mini perms) offered under the mini perm umbrella (see Table 1).
Because repaying the debt fully in the shorter term of the mini perm is unlikely to be feasible-the user or contract charges would be much higher-the use of mini perms creates new risks for borrowers that they may also attempt to pass back or share with public authorities. These risks may include:
• Refinancing risks: The borrower will have to refinance a hard mini perm and will almost certainly want to refinance a soft mini perm. So, the borrower will face the risk that banks or capital markets may not offer better terms in the future. If the terms are not better in the future, the borrower may incur increased costs with no ability to pass these on to the public authority or users. Future financing is particularly critical when a contract is being bid for a fixed fee over a long-term interest rate.
• Uncertain hedging strategy: Because the future debt profile is not known, it is difficult to establish an effective interest rate hedge at the outset.
• Soft mini perm margin costs: For many PPP-type contracts, a fixed fee is calculated for the long-term concession period at the outset of the contract. If mini perm financing is being proposed, the following assumptions need to be considered to calculate the fixed fee:
- what are the long-term interest costs,
- what are the long-term margin costs, and
- who benefits if the transaction is refinanced on better terms than the forecast?
The recent dominance of the mini perm type structure may point to a shift away from the assumption that long-term bank debt is put in place for projects at the outset and a shift torwards the approach of arranging bank debt for a construction period (if there is one) and, once an asset is operational, refinancing this debt through the capital markets.