Higher-for-longer interest rates have reset the economics of project finance. We examine which asset classes remain viable and where restructured capital structures are emerging.
The project finance model — long-tenor, leveraged, cash-flow-based — was built on an assumption of declining real interest rates. That assumption held for four decades. It no longer holds, and the entire asset class is being stress-tested for the first time in a generation.
The implications are not uniform across sectors. Renewable energy projects with long-term PPAs and stable cash flows remain viable. Toll-road concessions with traffic risk become harder to underwrite. Airport privatisations with dual-till structures need more sophisticated modelling. The common thread is that debt sizing and tenors need to be rethought.
Restructured capital structures
We are seeing three emerging responses in the market. First, a greater role for mezzanine and preferred equity to bridge the equity gap created by reduced debt capacity. Second, longer tenor structures with amortisation profiles that better match asset lifecycles. Third, the use of inflation-linked instruments to hedge the real-rate risk embedded in long-duration infrastructure.
The era of cheap long-term debt is over. But the underlying need for infrastructure capital has never been greater. The question is whether the market can adapt faster than the assets deteriorate.
At IIG, our infrastructure and project finance practice has been at the centre of this restructuring. We have advised on some of the most complex project finance mandates in India and SE Asia, and the demand for sophisticated capital structure advice is increasing.