Andrew Davison, a senior vice-president at ratings agency Moody’s, said in a recent report that the European Commission (EC) and the European Investment Bank’s (EIB) proposal to credit-enhance private sector infrastructure bonds could lift those bonds into A-rating territory.
“In certain circumstances, the European Commission's outline proposals would be capable of credit-enhancing PPP [public-private partnership] project bonds from low investment grade to single-A ratings,” Davison commented. Like Fitch before it, Moody’s also stresses the “need to assess the credit quality of each project on its own merits as part of any rating engagement”.
The Europe 2020 Project Bond initiative, as the EC/EIB effort is known, proposes to enhance a bond’s credit rating by providing either a fully funded subordinated debt tranche or an unfunded subordinated debt guarantee. Both mechanisms should be able to cover up to 20 percent of a project’s senior debt and will be provided by the EIB. Subordinated debt ranks below senior debt and above equity.
The credit enhancement mechanism’s objective is to lift European private sector infrastructure bonds out of the lower echelons of the investment grade category (BBB) to A-rating territory, where a larger number of institutional investors will be, in theory, more comfortable buying these bonds.
Moody’s states that both credit-enhancing mechanisms – a funded subordinated debt tranche or an unfunded debt guarantee – are “materially credit positive”, but notes that there are important differences between the two options.
Specifically, Moody’s points out that the guarantee of up to 20 percent of a project’s senior debt increases the total amount of committed funds for a project, whereas introducing a subordinated debt tranche only reduces the amount of senior debt used for a project.
The ratings agency also highlighted a recent study where it analysed the performance of more than 2,500 project finance loans from 1983 to 2008, accounting for almost 45 percent of all projects financed since 1993, and found that recovery rates for project finance loans were consistently high, averaging 76.4 percent.
This led it to conclude that “project finance debt obligations are structured to be both highly robust to a wide range of potentially severe risks, and also to minimise any post-default economic loss”.
As reported by Infrastructure Investor yesterday, the Europe 2020 Project Bond initiative is due to launch in 2014, but Philippe Maystadt, the president of the EIB, is eager to test the mechanism sooner. To read the full article, please click here.