Crucial period for EIB project bonds starts tomorrow

The European Investment Bank’s (EIB) much-vaunted project bond initiative kicks-off tomorrow, setting in motion a critical period that will determine whether the pioneering scheme will be allowed to sink or swim beyond the next 18 months.

With all the European Union (EU) red tape now out of the way, EIB president Werner Hoyer and European Commission (EC) vice-president Olli Rehn will tomorrow put pen to paper on launching the pilot phase for the project bond initiative.

This initial stage will see the official disbursement of €230 million of EC money formerly earmarked as grants to trans-European transport, energy and broadband projects. The funds will now be used by the EIB to help credit enhance close to €700 million of infrastructure debt, which in turn could help catalyse up to €4.4 billion of deals, a multiplier effect of 19 times.

The credit enhancement will be provided using either a fully funded subordinated debt tranche or an unfunded subordinated debt guarantee, which can cover a project’s full life-cycle. The credit enhancement mechanism will apply to project bonds issued by sponsors to help mitigate construction, operations, performance and/or traffic risks. 

The EIB’s gambit is that its intervention will help raise the rating of these bonds from a sub-investment grade BBB to A-rating status, making it more palatable to scores of pension funds and insurance companies across the continent. Initial projects under consideration include Belgium’s A11 motorway public-private partnership (PPP), the German A7 road PPP and several UK offshore transmission links (OFTOs).

But senior sources at the EIB pointed out that the bank is under pressure to show results for the pilot phase over the next 18 months, otherwise it is probable the planned 2014 full rollout of the project bond initiative will not materialise.

“If there are no projects [benefiting from the project bond initiative] until the middle of next year, then it is highly likely that the project bond initiative will not launch in 2014,” a senior source involved in the process warned. The EC will conduct a first evaluation of the project bond initiative early next year, the source added.

The bank faces several challenges during the pilot phase, including drawing attention from sponsors and procuring authorities to project bonds. The authorities will also be required to make several changes to traditional procurement processes to allow for this new source of funding, including allowing non-committed financing at the  ‘best and final offers’ stage and putting in place a timetable that allows for credit rating agencies to rate these instruments, among other requirements.

But even if the pilot phase is successful, the amount of money to be set aside for the project bond initiative will only be allocated in the next EU budget, covering 2014 to 2020. Discussions for the latter have been fraught with tension, with the UK demanding a real terms cut to the budget.