The European Parliament has approved a pilot scheme to test the European Investment Bank’s (EIB) project bond initiative, setting aside €230 million from the European Union (EU) budget to fund the first projects using this mechanism over this year and next.
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 the capital markets. Originally, the initiative was scheduled to launch in 2014, but former EIB president Philippe Maystadt pushed for the mechanism to be road-tested before then.
According to the European Parliament, 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.
“Europe’s economic crisis stems not only from the financial one, but also from declining investment. Given tough national budget restrictions and bank requirements, we must find new ways to boost investment for growth. Project bonds should make investing in important infrastructure projects more attractive to capital market investors,” the European Parliament said in a statement.
In a recent note, ratings agency Fitch said that US investor interest in EU infrastructure funding is on the rise, highlighting the US private placement market as a good source of debt for European assets. However, Fitch pointed out that currency volatility, alongside a perceived lack of transparency in EU bond markets, was likely to limit the scale of US investment in Europe.
The Financial Times today also sounded a warning over the health of the European bond market, saying that certain parts of Europe are experiencing a ‘bond run’, as foreign investors flee the government and corporate bond markets in troubled countries like Spain and Italy.