Three project bond deals in a month? To unwitting observers, it might not sound quite like a bonanza, but in the context of the European infrastructure financing market, three project bond deals in a single month is something special indeed.
As has been oft-repeated, Europe was home to a thriving infrastructure project bond market in the noughties – worth in excess of £100 billion (€115 billion; $152 billion) – that came crashing to a halt when the financial crisis hit the monolines hard.
Since then, the hunt has been on for solutions that would allow the capital markets to contribute to project financing and help plug the gap left by retreating banks, especially for greenfield projects.
Two promising solutions are finally bearing fruit. One is an oldie – the return of the monoline wrap by one of the few monolines, Assured Guaranty, that still has a strong enough credit rating to provide it. The other is brand new – the European Investment Bank’s (EIB) project bond credit enhancement mechanism – but no less important in scope.
For Assured Guaranty, July saw it clinch its first primary transactions since 2008, wrapping bonds for two small accommodation projects in the UK and Ireland. Good news, but in a way, the projects were very much the type of public-private partnership (PPP) deal Assured Guaranty had wrapped a hundred times in the pre-crisis days.
The stakes were much higher for the EIB’s project bond solution, though. As neat as the idea of using subordinated debt to credit enhance infrastructure project bonds was, it had already claimed one high profile scalp – Aviva Investors’ and Hadrian’s Wall Capital’s joint infrastructure debt fund.
That helps to mitigate the slight disappointment in seeing that the EIB’s first ever project bond deal was not some high-profile greenfield trans-European transportation PPP, but, rather, the refinancing of a Spanish gas storage facility.
As far as testing a new concept goes, it’s probably easier to test it with a refinancing than with a new build project, which would probably require significant and time-consuming changes to procurement processes.
However, the EIB still had to employ considerable brute force to get its first project bond deal over the finishing line. In addition to the €200 million unfunded subordinated debt facility that acts as the bonds’ de facto credit enhancing mechanism, the bank spent an extra €300 million buying bonds in the market. That means the EIB effectively financed about a third of the €1.4 billion bond issue.
None of which changes the fundamental signal coming out of the European capital markets: give us appropriately structured, creditworthy project bond transactions, and we will flock to them.
It’s just a shame that, discounting M&A financing, European PPP levels are at their lowest for a decade.
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