PROFILE: Metlife builds out private placement business

NEW YORK, Oct 19 (IFR) - One of the biggest players in the private placement market, MetLife, is launching a third-party asset management business that will build upon its expertise in private placement debt.

The business, branded MetLife Investment Management, will focus on creating investment opportunities that can generate attractive, long-term returns for other institutional investors, including insurance companies, public and private pension plans and sovereign wealth funds. It will give MetLife added fire power when offering its products to sponsors.

MetLife Private Capital Investors will originate and manage a wide spectrum of investments, including corporate private debt, project finance and infrastructure debt, and equity in renewable energy for third-party clients.

MetLife's private placement debt organisation, to be renamed MetLife Private Capital Investors, will be led by MetLife's global head of private securities, Scott Inglis. Existing staff levels are expected to be sufficient on the investment side, though marketing and investor professionals will be added to promote the team's efforts.

The move comes as new chief executive Steven Kandarian looks to increase MetLife's return on equity to at least 12% by 2016. The scale of the initiative will provide bilateral and club transaction opportunities, with capabilities to invest across all major currencies.

The goal is to provide insurance companies, pension plans and other institutional investors with the ability to access private fixed-income assets that many have been unable to access.

"As pension plans de-risk their portfolios and increasingly move toward liability-driven investment strategies, we anticipate strong investor demand for these private fixed-income asset sectors, which often feature attractive risk-return profiles compared with public bonds," Inglis told PFI.

MetLife's announcement has led to reports of what is expected to be a growing rivalry between MetLife and Prudential, which has been a mainstay in the project finance space as the lead on the institutional tranches for deals such as the recently closed LS Power Centinela solar energy project, a 170MW photovoltaic solar farm near El Centro, California.

The financing was structured with two tranches - combining a long-term institutional financing led by Prudential Capital Group with a shorter-term bank financing led by Sovereign Bank as co-ordinating bank and joint lead arranger, and four other joint lead arrangers: Union Bank, Rabobank, CIBC, and NordLB.

Morgan Stanley and Citigroup advised on the financing. The deal was closed with more bank financing than bond financing, the opposite of what was expected when the transaction was being structured. This was due in part to the fact that some institutional investors bought both pieces of the deal.

MetLife originated US$8.8bn in private placements in 2011 for its general account and existing third-party accounts, and currently manages a portfolio of approximately US$50bn in private investments among more than 900 issuers globally.

Between US$8bn and US$10bn in private placements per year has been the norm historically for MetLife, and that target remains. However, stronger demand and new opportunities have necessitated the new focus with third-party cash.

These opportunities will stem in part from the expected refinancing wall surrounding infrastructure assets, with banks reluctant to re-up and sponsors hungry for steady long-term debt without the ups and downs of variable-rate debt.

Infrastructure players with a 20-year-plus history in privatisation will be targets, as they are thought to be an excellent fit with MetLife's long-term liability portfolio, and assets with an investment grade will be preferred.

Existing, hard assets in markets with high barriers to entry will be evaluated for opportunities, including all the types of projects in which MetLfe has traditionally been active, from airports to shipping ports, parking garages, and pipelines.

The increase in US private placements follows the Federal Reserve's pledge to keep borrowing costs low to stimulate the economy.

Goldman Sachs' 2011 annual report says that outsourcing of asset management by insurers has accelerated because of "new capital regimes, greater demand as a result of the financial crisis and a sustained low-interest rate environment".

And MetLife's announcement caps off months of increasing activity in the US private placement market for projects across the world. A handful of US solar deals have sought financing there, with the latest, Imperial Solar, now in the market through Morgan Stanley and Citigroup.

The US$415.7m private placement to back Imperial Solar is a combination of four/two private placement/cash grant bridge loan financings to back AES and 8minutenergy Renewables' Mount Signal solar PV project in Imperial Valley, California.

The total size of the deal is roughly US$700m, comprising a 25-year bond with a 15-year average life and a US$220m two-year loan. Pricing is expected to be in the range of 5-1/2%. The deal highlights the trend of US banks providing both private placement and loan capabilities for construction and long-term financing for projects.

Moving beyond solar, in North America the market has been used extensively for small mining projects and even to fund the equity component of schemes, as in the case of Gaz Métro's recent US$75m deal to fund a portion of the development of Green Mountain Power Corporation's Kingdom Community Wind project in Vermont.

International sponsors are increasingly taking advantage of the availability of finance in this market as well, as demonstrated by the SBM Offshore Brazilian FPSO deal, an inaugural US$500m US private placement project bond with 16 institutional investors (see Brazil file in this issue).

The bond, which is rated Baa2/BBB by Moody's and Fitch, carries a 5.5% fixed coupon for a 15-year maturity. The proceeds will be used to fund the refurbishment of the FPSO Cidade de Anchieta, which started its service for Petrobras on September 10 this year under an 18-year lease and operate contract. Mitsubishi UFJ Securities USA, ABN AMRO Bank and TD Securities are the banks involved in the deal.

Last month half the 1.3bn pounds bank debt on the UK's HS1 high speed rail project between London and the Channel Tunnel was taken out by a US private placement. Initially, the Borealis/OTPP sponsor group was seeking US$250m but in the end managed to raise US$950m in a split sterling and dollar funding. Australian energy and infrastructure companies have also been frequent visitors to the US PP market.

(This story was published in the Oct 17 issue of Project Finance International, a Thomson Reuters publication)

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