EIB closes landmark project bond deal

The bank credit enhanced a €1.43bn bond issue for a Spanish gas storage facility via an unfunded €200m subordinated debt guarantee. It spent a further €300m buying bonds.

The European Investment Bank (EIB) has clinched its first ever project bond deal in a landmark transaction that could ensure the credit enhancement initiative – currently in its pilot phase – becomes a permanent fixture.

In a conference call this morning, the EIB said it had contributed €200 million via an unfunded, subordinated debt facility to help credit enhance €1.43 billion of senior secured bonds issued by Castor, a Spanish gas storage facility responsible for storing some 30 percent of Spain’s daily gas consumption.

In addition to the credit enhancement facility, the EIB also spent €300 million buying the bonds, which mature in 2034 and closed last Friday with a coupon of between 5.75 percent and 6 percent, Cormac Murphy, responsible for the EIB’s project bond initiative, said on the call. The bonds were rated BBB by Standard & Poor’s and BBB+ by Fitch.

Murphy said the bond issue proved especially popular with pension funds and insurance companies, which made up 61 percent of the investor base. He attributed this popularity to the bonds’ long tenor. Other agencies, including the EIB, accounted for 25 percent of the investor base, with fund managers and banks making up about 10 percent and 4 percent of investors respectively.

Geographically, German investors (28 percent) flocked to the issue, followed by investors from the Benelux countries (23 percent), Spain (18 percent), France (11 percent), the UK (10 percent) and Italy (10 percent), Murphy detailed.

Even though the EIB’s project bond initiative aims to ideally credit enhance bonds into A-rated territory, which would open infrastructure bonds to a critical mass of investors, Murphy was happy with the Castor deal, noting the bonds were still rated “one notch above Spain’s sovereign rating” and pointing out the ratings agencies have a “sovereign ceiling,” preventing bonds from being rated more than a notch above a sovereign’s rating.

Considering the EIB funded Castor entirely from its balance sheet, the €230 million made available by the European Commission to help fund the project bond pilot phase is still to be drawn, Murphy pointed out.

In addition to Castor, the bank’s board is looking at nine projects worth €1.4 billion of credit enhancement facilities. They include motorways in Slovakia, Germany, Belgium and the UK, grid connections and offshore wind farms in Germany and the UK, as well as gas storage facilities in Spain and Italy.

Asked why he believed the EIB’s project bond facility had succeeded when the Aviva Investors Hadrian Capital Fund 1, managed by Hadrian’s Wall Capital, which offered a similar product, recently wound up without clinching a deal, Murphy pointed to the “supporting role of the EIB, which has just invested €500 million in this issue [and] the optionality of the EIB’s unfunded structure, which offers a lot of flexibility”.