Investors like EIB project bonds but want more clarity

Global law firm Freshfields Bruckhaus Deringer asked European infrastructure investors and other market participants for their thoughts on the European Commission and the European Investment Bank’s (EIB) proposed credit enhancement mechanism for privately financed infrastructure projects – the Europe 2020 Project Bond initiative.

The conclusion: European investors are supportive of the initiative – which aims to move private sector infrastructure bonds into A-rating territory by using either a fully funded subordinated debt tranche or an unfunded subordinated guarantee provided by the EIB – but want much more clarity on how the project bonds will actually work.

According to Freshfields, “more than seven out of 10 [respondents believe the initiative] would attract private sector institutional investors”. But “two thirds of respondents [said] that there is insufficient clarity at this stage [while] fewer than a fifth (19 percent) were happy that the proposals were set out clearly enough”.

Investors are anxious to find out who will act as controlling creditor in these transactions (“six out of ten respondents stated that the EIB was best placed to act as controlling creditor”); if the EIB will be able to juggle its “public policy role and its standing as an investor” in these projects; as well as getting more details on the bonds’ pricing.

“The infrastructure market is crying out for a tool that can help fill the funding gap left by the absence of the monolines in the greenfield infrastructure markets. The [project bond] initiative is clearly a very positive step in the right direction but the market will remain sceptical until critical elements of the solution are developed,” commented Nick Bliss, co-head of Freshfields’ Infrastructure & Transport Group.

Bliss added: “Real traction will only come through greater clarity being presented to the market and a rapid implementation given the market’s pressing needs.”

Philippe Maystadt, the president of the EIB, is also itchy to implement the project bond mechanism sooner rather than later. In an exclusive interview published in the July/August edition of Infrastructure Investor magazine, Maystadt said:

“Personally, I think that it would be a mistake to wait until 2014 to launch the first [project bond] initiatives. I think that if we are to have this project bond initiative fully up and running in 2014, it would be in our common interest to apply this instrument to real projects before that date,” before adding: “But this is my personal view – I can’t speak for the European Commission.”

To read the full interview with Philippe Maystadt, please click here.