Two steps forward

Propositions to get the European capital markets to invest more in infrastructure have made progress.

May saw two inter-related initiatives to stimulate wide-scale European capital market investment in infrastructure – the European Investment Bank’s (EIB) project bond initiative and Hadrian’s Wall’s debut infrastructure debt fund – take significant steps forward.

First was the European Parliament’s (EP) decision to green-light a pilot scheme for the EIB’s project bond initiative, to be funded with some €230 million from the European Union (EU) budget to road-test a first batch of projects.

Project bonds are an EIB/EU-backed credit-enhancement mechanism designed to bring private sector infrastructure bonds into A-rated territory, so as to make them more attractive to institutional investors. According to the EP, the €230 million set aside from the EU budget has a potential multiplier effect of between 15x and 20x, which could unlock some €4.6 billion in private sector investment.

The EIB will manage the pilot programme, which will see it credit-enhance some five to 10 projects, using either a fully funded subordinated debt tranche or an unfunded subordinated debt guarantee covering up to 20 percent of a project’s debt.

A few days after the EP decision, Hadrian’s Wall Capital and Aviva Investors announced the first close of their debut infrastructure debt vehicle, after having raised some £160 million (€200 million; $251 million).

Similar to the project bond initiative, the debt fund will pioneer a split-funding model, whereupon a company issues investment-grade senior debt which is divided into two tranches. The fund will invest subordinated debt in the first tranche, credit-enhancing the second tranche, which is then sold as a senior infrastructure bond to the capital markets.

Marc Bajer also ascribes a multiplier effect to his debt vehicle, remarking that “the fund will ultimately support the deployment of senior debt financing across both sterling and euros of approximately £/€10 billion at target fund size”.

Hadrian’s Wall and Aviva are targeting a final close of £/€1 billion for their maiden vehicle.