Future of European greenfield hinges on project bond pilots

The confidence needed to complete almost 500 greenfield infrastructure projects in the European Union, worth a total $233bn, is contingent on the success of pilot projects that will test the new Europe 2020 Project Bonds Initiative. This was the conclusion of an industry roundtable staged by Freshfields.

The investment in greenfield infrastructure projects needed to “power Europe out of recession” and “drive the…growth agenda” is dependent on the successful outcome of pilot projects that will put the European Investment Bank’s Europe 2020 Project Bonds Initiative to the test, according to a roundtable organised by law firm Freshfields Bruckhaus Deringer (Freshfields) in London.

The roundtable included representatives from a contractor/developer, the European Commission, the European Investment Bank (EIB), a rating agency, investment managers, financial advisers, an investment bank/lead manager and the UK government.

A statement following the roundtable said that “only the success of these pilots will boost industry confidence and enable some of the 479 EU projects worth $232.6 billion (212 worth $64.8 billion in the UK) that are still at the tender stage to become operational and help meet the estimated €2 trillion infrastructure investment requirement across the EU by the end of the decade”.

Hope is being pinned on the EIB’s Europe 2020 initiative because it is, in the words of Freshfields projects partner Nick Bliss, “the best developed” and “closest to delivery of results” of the proposed project bond solutions. He said “all eyes” would be on the early pilot projects and that the EIB had a “key leading role in building concensus to approaches and terms, and developing guidelines and models”. The initial pilots are scheduled to come onstream in the rest of 2012 and into 2013. 

The EIB’s initiative aims to credit-enhance private sector infrastructure bonds by using either a fully funded subordinated debt tranche or an unfunded subordinated debt guarantee covering up to 20 percent of a project’s debt.

But despite the EIB’s heft, a recent report from ratings agency Fitch saw as a best case scenario the development of a “small yet not insignificant” project bond market by 2015, propelled by the bank.

Fitch said: “Institutional investors may not be fully ready to step up their investments on the debt side, even if the shortage of bank funding now favours a significant development of the bond market for project finance. The unclear long-term future of this new market, the complexity of transactions, and the expected Solvency II capital charges are weighing negatively on the market's development.”

The need for what Bliss describes as a “new normal” in the financing of greenfield infrastructure projects arises from a constrained and still-contracting bank market in the wake of the crisis. Bliss says players need to “switch their mindset away from the dominance of the familiar bank finance to a more vibrant and diverse market, drawing on bond finance, bank finance and other debt models”.

In additon to the EIB initiative, Bliss referred to the UK Guarantees scheme, an Italian government project bond initiative and private sector solutions such as Hadrian’s Wall as “signs that the market is trying to break the vicious circle of a lack of financing and closed deals”.