Project Bond Initiative Aims To Unlock Capital For Infrastructure Projects

BMI View : The absence of project finance has been keenly felt across the European infrastructure space, with the volume of public-private partnerships ( PPPs ) severely depleted following the financial crisis. The challenges have been stacking up since 2008 to prev ent a return to pre-crisis boom. These challenges include the Eurozone crisis as well as the Basel I and II banking regulations placing capital requirements on banks' balance sheets. In order to help unlock funding, the EIB and the EU launched the Europe 2020 Project Bond Initiative. With the first bond announced on July 18 , it will be a key test to see if EIB credit enhancement is sufficient to draw investors back to Europe's infrastructure space.

The Europe 2020 Project Bond Initiative is a joint initiative of the European Commission and the European Investment Bank. The venture , launched in November 2012, aims to provide credit enhancement for infrastructure public-private partnerships ( PPPs ) , in particular Trans European Transport and Energy N etworks (TEN-T and TEN-E) and high speed broadband. The initiative works by providing credit enhancement to improve the credit quality of project bonds in order to attract institutional investors with high investment thresholds. It will do this by taking a subordinated debt in the project company, in order to elevate the credit quality of the senior debt.

The Project Bond Credit Enhancement (PBCE) is, in short, the process of taking subordinated debt and can be provided in two forms to a project company. The first is through a direct loan and the second is through a stand-by credit facility which can be drawn upon in the event that the debt service coverage ratio fall below a certain level, i.e. revenues are not sufficient to meet financial obligations. In both cases, the project company can apply for up to 20% of the senior bonds in PBCE, up to a maximum of EUR200mn.

Unlocking Capital Will Be Key To Reversal
Number of PPPs, Selected European Countries

Project Bond Initiative Aims To Unlock Capital For Infrastructure Projects

BMI View : The absence of project finance has been keenly felt across the European infrastructure space, with the volume of public-private partnerships ( PPPs ) severely depleted following the financial crisis. The challenges have been stacking up since 2008 to prev ent a return to pre-crisis boom. These challenges include the Eurozone crisis as well as the Basel I and II banking regulations placing capital requirements on banks' balance sheets. In order to help unlock funding, the EIB and the EU launched the Europe 2020 Project Bond Initiative. With the first bond announced on July 18 , it will be a key test to see if EIB credit enhancement is sufficient to draw investors back to Europe's infrastructure space.

The Europe 2020 Project Bond Initiative is a joint initiative of the European Commission and the European Investment Bank. The venture , launched in November 2012, aims to provide credit enhancement for infrastructure public-private partnerships ( PPPs ) , in particular Trans European Transport and Energy N etworks (TEN-T and TEN-E) and high speed broadband. The initiative works by providing credit enhancement to improve the credit quality of project bonds in order to attract institutional investors with high investment thresholds. It will do this by taking a subordinated debt in the project company, in order to elevate the credit quality of the senior debt.

Unlocking Capital Will Be Key To Reversal
Number of PPPs, Selected European Countries

The Project Bond Credit Enhancement (PBCE) is, in short, the process of taking subordinated debt and can be provided in two forms to a project company. The first is through a direct loan and the second is through a stand-by credit facility which can be drawn upon in the event that the debt service coverage ratio fall below a certain level, i.e. revenues are not sufficient to meet financial obligations. In both cases, the project company can apply for up to 20% of the senior bonds in PBCE, up to a maximum of EUR200mn.

By taking a subordinated debt position in these projects, not only is the EIB hoping to elevate the quality of senior credit, but also place its stamp of approval on a project. The EIB will carry out in-depth due diligence on a project's economic feasibility.

The hope is that by elevating the credit quality of the project bonds, this will allow institutional investors, such as pension funds and insurance companies, to purchase bonds within their often strict investment mandates. Institutional investors are deemed a good match for infrastructure debt owing to the long term liability structures which match the long term maturity of infrastructure assets. Over recent years, we have seen a drive from this type of investor to expand infrastructure exposure; however, this has often been prevented by regulations dictating minimum ratings on investments. In the last few months alone AXA announced a EUR10bn allocation for European infrastructure, whilst Legal & General stated it had GBP24bn ready to deploy into infrastructure (see, 'AXA Helps Insurance Fill The Financing Gap', 21 June).

Spain Kicks Off Proceedings

The first project bond to be launched under the scheme was announced on July 18. The project is an underwater gas storage facility, 20km of the coast of Valencia in Spain. The gas will be stored in a disused oil field which will be able to hold a three month supply. The project is being developed by Spanish construction company Grupo ACS and Castor UGS, which is partly owned by Canadian oil and gas company Dundee Energy.

The project is benefitting from a PCBE in the form of a stand-by credit facility. The credit line will kick in if the debt service coverage ratio falls below 1.05 times, to allow the project company to repay senior bond holders. The EUR200mn credit line will raise the rating of the project bonds to investment status, lifting it two notches to a BBB rating from S&P, and BBB+ by Fitch, according to Reuters. The EIB will also take a EUR300mn senior debt position on the project.

Declining Yield Prompts Project Bond
Spain: Generic 15 year Government Bond Yield

Currently the project is being funded by bank loans. The project company is looking to raise EUR1.434bn through project bonds, which it hopes should be a more cost effective source of funding. Yields on Spanish government debt have compressed substantially over the past year, boding well for the infrastructure project bond, which will trade at a premium to government debt. Indeed, Spain successfully issued a 15 year bo nd for the first time since 2011 in July, priced at 5.19%. The generic 15-year bond is currently trading at 4.95%.

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