Stepping back

The EIB hopes that its project bond initiative will help it gracefully step back from the prominent lending role it has assumed following the global financial crisis. But the new initiative may originate another cycle of EIB-dependence.

“In 2009 it was clear that we had to act as a temporary substitute for commercial banks. And 2010 was a record year for the European Investment Bank (EIB), as we lent almost €3.5 billion to public-private partnerships (PPP). So I think the bank has indeed played a role in supporting the European PPP market.”

Thus spoke (rather modestly) Philippe Maystadt, EIB president, in an exclusive interview published in the July/August 2011 edition of Infrastructure Investor magazine. The truth is that without the EIB’s critical intervention, the European PPP market would have sunk with all the grace and speed of a tonne of bricks dropping into the ocean.

Of course, once you step forward so prominently into the lending arena, it’s not easy to gracefully exit centre stage. Maystadt, and many in the market, see a pick-up in commercial bank activity that should, in theory, allow the EIB to retreat from its current levels of lending. But it’s also worth noting that the bank this year has already lent €1.2 billion in debt and equity to a massive high-speed rail PPP in France – its biggest ever French loan.

Wisely, Maystadt and the EIB are not waiting around to see if governments and the market will allow the bank to step back from PPP funding. As such, the bank has seized the initiative to start promoting a new source of liquidity – a credit enhancement mechanism that aims to move private sector infrastructure bonds out of the lower echelons of the investment grade category and into A-rating territory.

The idea is that A-rated bonds will transform larger numbers of institutional investors into senior debt providers. But there is a catch: the project bond’s success seems (again) entirely dependent on the EIB’s presence. How dependent? Dependent enough for the bank to get “reactions from some smaller investors saying that if the selection of projects [for the project bond mechanism] is not in the hands of the EIB, then they will not get enough confidence [to buy them],” Maystadt stated.

Since smaller institutional investors without dedicated infrastructure teams are the exact target audience for the EIB’s initiative, this type of reaction is both comforting and worrying. Comforting because it shows how much investors trust the EIB; worrying because it suggests that, without the bank’s presence, the project bond market might not last long.

So once we establish that the EIB’s presence will be necessary for some time if the project bond market is to have a chance to survive, the question then becomes: For how long does the bank want to keep supporting it, providing funded and unfunded subordinated debt tranches to credit enhance these bonds alongside its senior lending activities?

Maystadt hinted that he would like the bank to have a more formative influence on this new market: “We would be quite happy to lend our expertise to the launch of this instrument, but once this instrument is known in the market, we really hope other financiers will come in and also play a role.”

The question is which institutions will be able to fill the EIB’s rather large shoes and engender the same kind of confidence as the bank. Will institutional investors trust commercial banks to structure this mechanism to suit their needs? And if not, what are the alternatives? Only time will tell. But the EIB should steel itself for what may turn out to be a rather protracted launch period.