First EIB project bond may fail to get A rating

The European Investment Bank (EIB) is on the verge of closing its first ever project bond credit enhancement facility for Castor, an underground gas storage project in Spain. But it appears the bank’s credit enhancement will not be enough to push the bond into A-rated territory. 

“Castor would be the first project eligible for the project bond initiative to use such a facility. The project promoter is currently in discussions with potential investors and a full announcement will be made following financial close of the project,” a spokesman for the EIB said in an emailed statement. 

Castor will issue a €1.43 billion senior secured bond maturing December 31, 2034, to refinance outstanding construction loans, terminate “the swaps currently in place, and to partially fund the debt service reserve account,” ratings agency Standard & Poor’s (S&P) explained. 

The bond will benefit from €200 million of credit enhancement from the EIB at issuance – covering some 14 percent of the bond – which will decrease as the bond amortises to a maximum of 20 percent of the outstanding amount. 

According to Castor’s bond prospectus, the EIB is essentially providing a subordinated debt instrument that can be drawn upon to help mitigate the impact of several “stress scenarios”, such as cost overruns or lack of funds to service scheduled debt service. 

But despite the EIB’s credit enhancement, S&P is proposing to rate the bond no higher than BBB, with a negative outlook. One of the stated purposes of the EIB’s project bond initiative is to help raise bonds from a sub-investment grade BBB to A-rating status, making them more palatable to scores of pensions and insurers across Europe. 

The main reason for S&P’s BBB rating is tied to Castor’s “high exposure to Spain’s country risk”, S&P argues, noting that its preliminary bond rating “is one notch higher than our long-term sovereign credit rating on Spain”. 

The ratings agency highlights several project vulnerabilities, including “an uncertain regulatory environment due to rising fiscal and economic risks in Spain […] risk of potential revenue arrears derived from the potential for a gas tariff deficit in Spain […] uncertainty associated with the investment costs finally recognised by the government in its calculation of the asset-based remuneration [as well as] a highly leveraged financial profile”. 

BNP Paribas, Credit Agricole, Bankia, Caixabank, Natixis, Santander and Societe Generale are arranging a series of fixed income meetings on behalf of the sponsor starting Tuesday, July 16. In a separate note, ratings agency Fitch proposed to rate the bond BBB+.

The EIB is currently piloting its project bond initiative, with the bank’s board looking at nine projects worth €1.4 billion of credit enhancement facilities. The projects comprise 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. 

The success of the pilot phase will determine whether the initiative gets funding from the European budget for the period 2014 to 2020.