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French securitisation vehicle to launch mid-2011

The government is gearing up to launch a vehicle that will allow the capital markets to refinance PPP debt post-construction without exposing them to project risk. The bonds issued will have the same rating as the French state (AAA) in projects where it is the procuring authority.

The French government is getting ready to launch a securitisation vehicle in mid-2011 that will allow institutional investors to help refinance public-private partnership (PPP) debt post-construction without exposing them to project risk, a public sector source told Infrastructure Investor.

The initiative, known as the Fonds Commun de Titrisation (FCT), is the brainchild of a working group including banks like Dexia, HSBC and Natixis, together with developers and government representatives. It was first presented to the finance ministry in the summer of 2010.

The securitisation vehicle will work by issuing bonds to refinance PPP debt immediately following the construction period using a mechanism known as the Dailly law. The latter allows developers to transfer the availability payments they receive from procuring authorities directly to their creditors, once a project is delivered.

In a standard PPP arrangement, developers have to deliver and manage an asset up to certain standards to be entitled to the payments owed them by procuring authorities. If they fail to do so, the performance-based availability payments will dip, compromising their ability to service debt. This puts pressure on developers’ creditors to make sure everything goes smoothly.

Under Dailly, the risk of ascertaining whether a project has been delivered to pre-agreed standards shifts back to procuring authorities, which become responsible for levying any subsequent penalties incurred by developers as a result of breaches of contract. As far as the creditor is concerned, once Dailly is activated, he deals only with the government entity and its credit rating.

What the new securitisation vehicle proposes to do is to refinance this Dailly tranche – which can cover up to 80 percent of the debt for PPPs, leaving a minimum of 20 percent of the debt at risk for the developer – via bond issues.

Since these bonds will be directly backed by availability payments, the institutional investors buying them will not be exposed to project risk and will, effectively, hold AAA-rated paper if the payments backing them come from the French state. If the state is not the procuring authority, the bonds will have the same rating as the public entity sponsoring the project.

The public sector source explained FCT was born out of the government’s dissatisfaction with the high cost of bank debt. “We are still uneasy with the cost of bank debt, even for projects that are covered by the government’s debt guarantee,” the source said. Following the financial crisis, the French government implemented a guarantee that can cover up to 80 percent of the debt used for PPP projects, in a bid to keep bank debt from drying up.

But he pointed out that banks are also interested in the success of the new vehicle, as regulatory changes threaten to make long-term loans even harder (and more expensive) to provide. “Bonds are being pushed through by all participants in the market,” the source stressed.

To find out more about France’s multi-billion euro deal pipeline, be sure to read our country report on France to be published in the February 2011 issue of Infrastructure Investor magazine.