Dried-up project finance returning, driven by Asia

* Project finance lending recovering after hitting bottom

* Developers looks beyond loans to capital markets

* Funding options allow for less equity in projects

By Greg Roumeliotis, European Infrastructure Correspondent

BRUSSELS, March 16 (Reuters) - Project financing is recovering from the fall-away seen in early 2009, buoyed by growth in Asia, but developers have to look at a mix of funding options for their schemes, industry experts say.

Investors looking for project-specific funding for infrastructure such as roads, power plants and oil and gas pipelines have increasingly met reluctance from banks, which are less keen to provide long-term financing.

This is because around 80 to 90 percent of loans that banks provide are short-term, between one and three years, leaving project finance which traditionally relies on loans with maturities longer than ten years to suffer from the liquidity crunch.

"There is a huge amount of competition for capital within banks," Andrew Bartlett, head of oil and gas project finance for Standard Chartered (STAN.L), told the Projects & Infrastructure International conference in Brussels on Tuesday.

"However, 2010 has started exceptionally strongly," he said. "There is huge growth in India, there is phenomenal growth there for our bank. Trade flows are also driving greater investment in Middle East and Africa."

Since 1995, project finance deals have been completed around the world totalling more than $1.5 trillion, but global activity dropped by 40 percent in 2009 as the funding costs of banks increased, making long-term finance scarce and expensive.

"The atmosphere is different from last year, banks have slowly started to underwrite again, pricing peaked and has begun to fall," Liam O'Keeffe, a project finance loan syndicator for Credit Agricole (CAGR.PA), told the conference.

O'Keeffe said the recovery had been driven by Asia and the Americas, but warned uncertainties still clouded the market, including weak economic growth, sovereign and currency risks, new bank regulations and the drying up of government stimulus.

However, he said the low default rates of project finance loans highlighted their resilience in the downturn. In 2009, project finance loans accounted for 7 percent of global loan activity, up from 3 percent in 2006, he said.

FUNDING OPTIONS

The recent difficulties in securing favourable project finance loan terms have prompted many developers to look at capital market solutions, either to complement loan funding or refinance expensive loans with more attractive bonds.

"There is a gap in the market, and bonds can finance the same kind of projects as loans," Derek Rozycki, executive director for project and corporate finance at Abu Dhabi government-owned investment fund Mubadala told the conference.

Rozycki said Mubadala, which has tapped capital markets to refinance its majority-owned Dolphin gas pipeline linking Qatar with the United Arab Emirates and Oman, has seen interest for its project bonds beyond the traditional U.S. pool of investors.

"We now see more interest from European and Gulf investors, particularly London-based asset managers and emerging market funds," he said.

"Investors have been burnt by holding a slice of a slice of a million different things, they like holding paper in a project where they know how much money is coming in and how much money is coming out."

However Rozycki cautioned that project bonds lack the liquidity of sovereign and corporate bonds and that asking investors to take construction risk was challenging. "They may need extra love to get them through, how you price the deal is important," he said.

Having funding alternatives means developers are under less pressure to put in their own money as equity in projects, he added.

Growth in project finance will be driven by the increased use of public-private partnerships, particularly in Western Europe, as well as investment in renewables and also nuclear energy, Credit Agricole's O'Keeffe said.

(Editing by David Cowell)