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Credit Crunch: A challenge or an opportunity?

We are a year into what is widely recognized to be a global economic downturn, with some countries such as the United States now experiencing a full-blown recession. At the time of going to press, the world’s stock markets were reeling from the collapse of Lehman Brothers, America’s fourth largest investment bank and a name synonymous with Wall Street. This was immediately followed by the US Federal Reserves’ rescue plan for insurance giant American International Group (AIG), to the tune of $85 billion.

One financial institution saved while the other was allowed to go to the wall à‚— why? Put simply, AIG is so ‘plugged into’ not only the US economy, but also those of many other countries around the world that if it had been allowed to fail the repercussions in the global financial industry would have been unimaginable.

What both these events clearly signal is that the so-called credit crunch looks set to be with us for some time to come. Earlier this year financial analysts and commentators talked about economic recovery within 18 months to two years. Now, they are reluctant to give a time-line on when a global economy recovery might occur.

But what will a continuing economic downturn mean for the global power industry? If we look at merger and acquisition activity, there was no evidence of a fall-off in deal activity as the credit crisis broke last year. This is the main conclusion of PricewaterhouseCoopers’ annual review, and in actual fact the report found that over 50 per cent of ‘power sector deals’ à‚— which refers to activities in both the electricity and gas utilities sectors à‚— occurred in the second half of 2007. You could argue that it is not unexpected to see a rise in M&A activity at a time of economic uncertainty. It could in part reflect what is currently happening in the US and UK banking systems, namely that companies which are less financially strong look to link up with companies with greater financial clout as a safe haven to weather the current economic turmoil. It will be interesting to see if this trend has continued in 2008.

Confidence is further supported by the 2008 half-year results of Europe’s power majors, which report ‘strong to satisfactory’ performances, with many showing an increase in revenues. Even Germany’s RWE, whose operating results were down 8 per cent on the same period last year, remains confident that it will experience good organic growth this fiscal year.

If we look at financing of power projects, things are less clear. For example, in a recent report by London-listed brokerage, Arden Partners, India power companies were expected to delay billions of dollars of investment plans, despite the country’s overwhelming need for investment in its power infrastructure, because they were finding it hard to raise the necessary funding in the current economic climate. There are even signs in the petrodollar-rich Middle East region that all is not well. Peter Barker-Homek, CEO of Abu Dhabi National Energy, has been reported as saying that problems in raising capital could hold back its expansion plans.

However, in an interview with PEI’s sister title Middle East Energy, Ranald Spiers, International Power’s Executive Director à‚— Middle East & Asia, said: “Project finance is very transparent because it involves simple assets, simple projects, predicted cash flows, and so the banks like this kind of business, compared to more opaque financing, such as mortgages.” He added that his company is living proof that business can go on after credit crunch because the deal for Fujairah F2, which will be the world’s biggest IWPP upon completion, was financed in the teeth of the credit crunch last August.

Although this sounds positive, looking longer term I doubt there is a power company’s boardroom across the globe that is not expressing some concern because of the well-documented link between economic growth and electricity consumption. At the moment there is no sign that the world’s craving for electricity is abating, however, you only have to think back to the Asian Financial Crisis in the 1990s, when the region’s stalled economic development resulted in a precipitous fall-off in the demand for power.

I’d like to, however, end on a positive note by quoting the words of Normen Kegler of the Independent Power Producers Forum, in an interview published in this issue, à‚— “A crisis can be as much an opportunity as it is a challenge”.

Kind regards,
Heather Johnstone
Senior Editor

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