The project bond breakthrough

Category: European energy

Winner: Castor Gas Storage

Nominated by: Natixis (structuring bank, joint book-runner, rating adviser)

Other participants included:
European Investment Bank (credit enhancement provider); BNP Paribas, Bankia, Credit Agricole, Caixa Bank, Santander, Societe Generale (bond issuers); ACS Group (sponsor); Dundee Realty Corporation (sponsor); Cobra Instalciones y Servicios (developer); Gaffney Cline Associates (technical adviser)

Date of transaction: 25th July 2013

Size of transaction: €1.4bn 


When the European Investment Bank’s (EIB) Project Bond Initiative was launched towards the end of 2012, it was with the lofty ambition of “re-opening capital markets as a source of financing for crucial transport, energy and communications infrastructure” according to an EIB statement at the time.

The initiative, which offered credit enhancement as way of luring institutional investors, was one of a number of solutions in both the public and private spheres that aimed to stimulate long-term infrastructure financing in the wake of the Crisis and the subsequent pressures on traditional bank lending.

The first project bond to derive from the initiative was the one applied to the 30-year concession to construct and operate the underground offshore Castor gas storage facility off the coast of Castellon in Spain. The project, which makes use of a depleted oil reservoir, is regulated according to a Regulated Asset Base (RAB) scheme by which payments come from the Spanish gas system.

According to the award submission from French bank Natixis, the deal meant that developers and grantors could now consider project bonds as “a viable and feasible financial alternative to long-term bank debt, and not just a theoretical option”.

It added: “A lot has been said in relation to the natural fit between investors’ needs (long duration assets) and what infrastructure could offer them but few real examples reached financial close before Castor.”

The judges agreed, while also taking into account the time and effort that the structuring banks must have put into educating investors about the new product and its risk/reward profile, as well as the hefty €1.4 billion deal size in what was still a volatile market environment.

Since the deal was signed, unexpected seismic activity near the facility has raised question marks over the future of the project and prompted Fitch Ratings to give the bonds “ratings watch negative” status. Among the possible outcomes is that the government may terminate the concession.

While taking these developments carefully into account, the judges came to the conclusion that the award should be granted based on the innovations of the deal at the time of signing and the prospect that it helped to open up access to the asset class for long-term investors. While troubling, the subsequent issues faced by the project were not seen to be reason for a changed decision.

What the judges said:
“Pushes the boundaries. It may be ordinary gas storage rather than the Holy Grail of carbon dioxide but it’s still far from straightforward to do this kind of thing.”
“Not many deals like this have been done before and it turns the “jaw jaw” of 2012 [about project bonds] into serious business.”
“The project has had setbacks but if it’s structured right in a project finance sense there should be wriggle room.”

Honourable mentions in this category:
Cambridge University Hospitals NHS Foundation Trust Energy Centre (nominated by Aviva Investors)
London Array Offshore Transmission (nominated by Blue Transmission consortium)
Butendiek – wpd Wind Farm (nominated by UniCredit Bank)