Allan: Shakespeare wrote “What’s past is prologue.” Eric, the project finance market has evolved quite a bit over the years. You and Milbank were there at the very beginning, before “Project Finance” became the distinct practice area it is today. What propelled Milbank to jump into this area?
Eric: When I joined the firm in 1982, this kind of activity was largely being done by a few partners in what used to be the commercial banking practice at Milbank. Around the same time, there was a big effort to promote deregulation and encourage energy efficiency and cogeneration as a new type of power generation model. That wave of privatization in the electricity sector created opportunities for new entrants. We saw this as a potentially very high-growth area.
Allan: At some point the firm began pivoting from representing only lenders to also representing developers, investment banks, contractors, and others. What was the rationale behind that?
Eric: We were thinking about how to differentiate ourselves from entrenched firms that had a lock on the business. And we decided the best way to do that was to immerse ourselves not just in the financial transaction side of the business, but also the regulatory and the commercial sides as well. We wanted to represent all the leading players who were getting involved in the early stages of the independent power business in the US. We felt like we needed to have our own pool of trained specialists to support our clients in this newly emerging independent power sector.
Allan: You had a lot of homework back in those days.
Eric: Right. We had to develop the knowledge and expertise of representing not just financial institutions, but also repre- senting developers and manufacturers like General Electric, Westinghouse, Siemens, and Mitsubishi.
Allan: That strategy turned out to be prescient.
Eric: Especially when it came to foreign investment. Over the course of the next 25 years, this business attracted a lot of interest from foreign investors, including utilities, oil and gas companies, trading companies and manufacturers, primarily in Europe, Asia and the Middle East.
Allan: It seems like the firm’s strategy came down to a few things. One was knowing the market and the players and being able to bring them together. Next was being experts in the regulations and creating the legal structures for these sorts of deals. Finally, we had to become experts in the sectors themselves, whether conventional power, renewables, oil and gas, other infrastructure, whatever.
Eric: Right. We had to be deeply familiar with the regulations, yes, and financing structures, yes, but also the commercial issues affecting the developers and the par- ticipants in the sectors, including things like the power purchase agreements and the engineering, procurement and construction contracts. All of these things became an important foundation for the evolution of the project finance business.
Allan: Excellent client service has always been a cornerstone of the culture at Milbank. But technology has changed the nature of it so much.
Eric: Oh yes. I can still remember how we used to have a daily courier pick up at four o’clock or six o’clock, and people would push around the office these big handcarts. If the documents you were working on were going to be delivered overnight, they were put on these handcarts and then couriered all over New York and all over the country. But obviously email dramatically changed how our work product was distributed, how fast it could be distributed, and how fast people could respond. I think that has all had a very significant effect on how lawyers interact with clients and how quickly we are expected to respond.
Allan: Another big change over the last 40 years is the evolution of capital markets, which are much more liquid. The debt used for these projects used to come principally from commercial banks, essentially from Japan or from Europe. But we’re seeing this shift, both domestically and internationally, where infrastructure funds, private equity and debt funds, and direct institutional investors, like insurance companies or pension funds, are playing a much bigger role. How do you see that playing out?
Eric: This has been a trend over the last 20 years, but it certainly was accelerated by the financial crisis of 2008/2009, and the increasing regulatory scrutiny of bank capital, and the risk-weighted nature of their assets. The reason that so much of this business has moved away from commercial banks is because these kinds of capital investments are long-life assets. A power asset might have a life of 25 years. An airplane might have a life of 30 years. And a petrochemical plant might have a life of 20 or 30 years. These kinds of assets are not well-suited, from a regulatory perspective, for bank balance sheets and bank capital these days.
These kinds of long-term credits are now much more likely to be held by institutional investors, export credit agencies, and non-bank financial institutions, who have a different regulatory and capital structure than banks. I think that the general trend is for banks to be more involved in shorter-term lending. And this kind of activity that we’re talking about, with long-life assets, really needs longer term debt in order to provide the kind of leverage that the sponsors and equity investors are looking for.
Allan: Right, so for an institutional investor, they’ve got long-term liabilities. They can match them to long-term assets when they invest in these kinds of projects in a much better way than a bank can. Are institutional investors able to do a good job of assessing project risks?
Eric: Oh yes, I would say many of them are extremely sophisticated and have staffed up with people who are experienced. And I think today you have a lot of very sophisticated institutional investors and pension funds who are driving a lot of the activity in the market.
Allan: What’s so interesting is how rapidly the practice of project finance has evolved. But some of the basic fundamentals have not.
Eric: I think that what we’ve seen is that these kinds of structures that we first started putting together in the 1980s are now much more widely accepted and viewed in a positive light. There was a time when we would create a viable financial borrower out of a conference room full of paper and various contracts and permits, and intellectual property rights, it was viewed almost like voodoo finance.
But I think that today, with private equity firms, lending corporations and financial institutions all over the world, these kinds of transactions — asset-based financing, largely based on contracted cash flows and risk mitigation through contracts — are very much a mainstream activity.
Allan: Being a pioneer in the practice must be gratifying. What gives you the most pride when you look back at your career?
Eric: We built a global team, which has worked collaboratively and on behalf of what I think are probably the best group of clients that you could ever hope to work with. I think the fact that we are able to continue to do this kind of work and have so many great long-standing client relationships is one of the defining characteristics of our practice. It has brought great prestige and prominence to our firm. But I also think we have helped a lot of clients to successfully execute their goals and achieve a lot of success through the use of these project finance techniques and structures that we helped to develop.