Kourkoumelis & Partners News EIB’s Europe 2020 Project Bond Initiative
EIB’s Europe 2020 Project Bond Initiative
23/10/2012 10:30

The objective of the Europe 2020 Project Bond Initiative is to increase the availability of debt financing for large-scale infrastructure projects in the target areas of transport, energy and broadband. The initiative is designed to enable promoters of infrastructure projects to attract additional private finance from institutional investors such as insurance companies and pension funds. The European Investment Bank (EIB), supported by the European Union, will provide credit enhancement to project companies raising senior debt in the form of bonds to finance infrastructure projects, thereby ensuring that these bonds can be placed with institutional investors.

The aforementioned bonds shall be issued by the project companies themselves, not the EIB or the Member States. EIB will provide credit enhancement in the form of a subordinated instrument (either a loan or contingent facility) to support the senior debt issued by the project company. As privately financed infrastructure, the project company will generally be a public-private partnership (PPP) established to build, finance and operate an infrastructure project. 

 

The expected results shall be an increased availability of private sector financing from the capital markets to finance key infrastructure. According to the European Commission, to meet the Europe 2020 objectives the European Union’s infrastructure investment needs could reach as much as EUR 2 trillion in the sectors of transport (TEN-T), energy (TEN-E) and information and communication technology (ICT). The legal base of the Europe 2020 Project Bond Initiative was adopted in the summer of 2012 by the European Parliament and the ECOFIN Council. The objective of the cooperation with the European Investment Bank is to build on existing experience with joint EU-EIB Group instruments and utilise the EIB’s expertise in EU infrastructure financing.

The main objective of the initiative is to create the conditions to attract additional private sector financing for individual infrastructure projects. In the past, capital market issues were an important source of financing for infrastructure projects. Monoline insurance companies guaranteed the full credit risk of senior lenders. However, since the financial crisis there have been few new issues guaranteed by the monolines. Furthermore, the sovereign debt crisis and pressure on banks’ balance sheets from higher regulatory capital and other requirements (Basel II and III) have constrained the other sources of long-term infrastructure financing. Accordingly, there is a need to find ways to promote private sector financing of infrastructure projects without increasing direct public funding and therefore public indebtedness. The Europe 2020 Project Bond instrument is designed to provide an alternative to financing projects through bank loans or public sector grants in order to close the infrastructure financing gap. If a project can be appropriately structured, grants and project bonds could even potentially be combined.

Institutional investors could be pension funds and insurance companies, i.e. investors with long-term liability structures and regulated rating requirements for their investments. For these investors, project bonds represent a natural match for their long-term obligations. Besides having access to a new/reintroduced asset class providing diversification and a good rating, investors will also be interested in project bonds because of the EIB’s expertise.

 

For further information refer to: