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So if there is a bubble and existing infrastructure assets are being bought and sold at inflated prices and with excessive leverage, what happens to the infrastructure when the bubble bursts and there is a credit crisis in the sector?

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Carrie (migeru at eurotrib dot com) on Thu Nov 30th, 2006 at 06:20:52 AM EST
in the mid-nineties with IPPs (Independent Power projects) in Asia, which governments (mostly Indonesia and Pakistan) had put on line with blatant disregard for the real needs of the market.
Same thing that happened to merchant power in the early years of 2000. When you disregard the market, the market fights back.
I know a little about those issues, having worked on the restructuring process of both Asian IPPs and US merchant power plants.


When through hell, just keep going. W. Churchill
by Agnes a Paris on Thu Nov 30th, 2006 at 07:13:06 AM EST
[ Parent ]
"Same thing that happened" means nothing if one doesn't know what happened.

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Carrie (migeru at eurotrib dot com) on Thu Nov 30th, 2006 at 07:23:48 AM EST
[ Parent ]
You are right, but that would stretch to diary length. Too happy to oblige.

When through hell, just keep going. W. Churchill
by Agnes a Paris on Thu Nov 30th, 2006 at 07:35:36 AM EST
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Well, the underlying assets will still be there, and will still function.

If you have a crisis caused by, to make it simple, higher interest rates, the company becomes unable to service its debt and defaults. The banks can then decide to take over the project (wipe out equity, i.e. the investors lose their money) and/or restructure - reschedule the debt, change the terms to make debt bearable. If it still doesn't fly, then banks will lose some of the money they put in (that can be done in an orderly fashion as part of the restructuring: banks cancel a part of the debt to have a chance to get the rest back). They may also start lobbying to change the underlying economics, i.e. increase prices of the services (tolls, airport fees, etc...) if set contractually rather than by markets.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Nov 30th, 2006 at 09:35:16 AM EST
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Doesn't rescheduling/restructuring the debt mean that the banks lose money? [Because the present value of the future revenue stream is reduced]

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Carrie (migeru at eurotrib dot com) on Thu Nov 30th, 2006 at 09:53:43 AM EST
[ Parent ]
It does, theoretically at least. However restructuring schemes are built on revised business plans, some of which actually manage to come up with higher profit forecasts on the long term. Market advisors can be very "creative"

When through hell, just keep going. W. Churchill
by Agnes a Paris on Thu Nov 30th, 2006 at 10:58:49 AM EST
[ Parent ]
Rescheduling can simply mean that principal repayments are pushed into the future, but interest keeps on being paid - thus no losses for banks.

There can be a reduction in interest rates payable to banks - formally no losses, but less revenue for banks than before

Then there can be debt cancellation (write off) - then banks will have formally lost money. What happens in practice is that banks have provisioned amount right from the start, and if a transaction looks to be in trouble, they'll provision more (before even having losses or even negotiating a restructuring). Using these provisions up when restructuring does not create losses for the bank (as they have been "preemptively" booked in earlier periods) Banks typically pile up a lot of provisions in good times (subject to tax authorities, as these provisions reduce profits and thus taxes payable) and can ride out quite significant losses for a while before it really hurts.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Nov 30th, 2006 at 11:15:56 AM EST
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No idea. Probably, the response is : it depends.

Looking at the chunnel, no, if you have some shareholders for taking the bloodbath.
If I have understand properly, it is a bonanza for the banks having financed it at the right time.

La répartie est dans l'escalier. Elle revient de suite.

by lacordaire on Thu Nov 30th, 2006 at 05:38:37 PM EST
[ Parent ]
as far as tolls are concerned, the potential for their increase is very strictly framed within the concession contract signed btw the public authority and the private operator. The headroom for increase is typically inflation plus peanuts, unless the  authority breaches their contractual obligations for eg. allows for another toll road to be built in order to directly compete with the first one. Lobbying is in this area a waste of time, unless the project gets to the point of no return and then it's banks' bargain power against that of public authorities. Would not place bets...
For airport fees, it is even more complicated, as the bulk of it is regulated by the IATA.


When through hell, just keep going. W. Churchill
by Agnes a Paris on Thu Nov 30th, 2006 at 11:05:57 AM EST
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