Rating agency Standard & Poor’s (S&P) has produced a report applauding Italy’s attempted shift from bank to bond financing as it seeks to attract institutional capital for infrastructure projects – but warned that the transition could be a slow one.
Italy, one of the worst hit of the Eurozone nations following the Global Financial Crisis, has an infrastructure spending requirement of around €340 billion between now and 2020 – with €180 billion of this requirement in energy alone.
Traditionally, around 80 percent of the country’s total project finance funding has come from bank loans and international financing institutions. But with banking regulations such as Basle III curtailing the banks’ appetite for long-term lending, Italy last year introduced laws to help kick-start a new public-private partnership (PPP) programme.
Among the laws was a Liberalisation Decree, which introduced a streamlined procurement process, a new form of PPP and the ability for project companies to issue bonds for the financing of infrastructure projects.
S&P, hailing the developments, says the laws “introduce a more innovative and benign legal and fiscal regulatory regime, one that could support the development of a project bond market”. It adds that they should allow Italy to tap the “increasing demand, confidence and appetite” among European and global institutional investors for infrastructure assets.
S&P also points to another new law – the First Growth and Development Decree – which allows guarantees “for a specific period, likely during a project’s construction phase or until such time as the project is picked up by the concession holder”. According to S&P, this “addresses investors’ reluctance to invest directly” in greenfield projects.
However, given Italy’s deep-rooted reliance on bank finance, the ratings agency believes progress from bank to bond will be “gradual”. It points out that investors have been reluctant to invest in Italian projects due to a lack of data and experience. It also says the Italian project bond market “remains untested” and that it will “take some time” for market participants to acquaint themselves with the new legislation.
Currently, there are no obvious signs of things changing. Italy’s BreBeMi motorway PPP, the largest PPP in Europe in the first half of this year at €2.3 billion, was financed entirely by bank loans. Furthermore, the €2.2 billion Tangenziale Est Milano road concession, which is on target to reach financial close by the end of this year, is also expected to rely on bank finance.