| Bert Schoen, head of CEEMEA structured finance and Bruce Riley, managing director, secured debt markets at RBS |
A huge number of projects across Europe need to be funded or refinanced – the European Union estimates EUR1.5 trillion will need to be invested in transport, energy and broadband between now and 2020. Following the financial crisis, the European loans market all but ground to a halt as lenders removed about EUR5 trillion of assets between 2007 and 2012.
The funding gap left by this lack of long-term lending has been partly filled by Japanese banks and, in some markets, local lenders.
But the overall lack of appetite for long-term lending has led to sustained efforts by European governments, pan-European institutions and the private sector to boost the use of capital markets for infrastructure projects’ long-term funding.
Historically, infrastructure assets were funded mainly through bank lending with sponsors using the capital markets after the construction phase was completed.
However, sponsors are now looking to issue project bonds at the very start of a project’s construction alongside other forms of funding.
While many businesses may be concerned about the extra work and public disclosure required to access capital markets, it’s actually not as difficult as it might initially look.
'Timing is critical. It’s vital to address capital markets investors’ concerns before the project gets underway, gauging investor appetite and guaranteeing their commitment at an early stage.' Timing is critical. It’s vital to address capital markets investors’ concerns before the project gets underway, gauging investor appetite and guaranteeing their commitment at an early stage.
This is particularly important in public authority projects such as roads, bridges and hospitals. Traditionally, when relying almost exclusively on bank funding, sponsors were able to submit a bid to the relevant authorities along with proof of their lenders’ full commitment.
Bond investors, on the other hand, are not yet set up for the complex process of working with bidders and issuers to demonstrate the certainty of funds required by many public authorities. This is unchartered territory which sponsors and investors have only just started to explore together.
Increasingly, we are seeing investors putting more time and energy into understanding what’s involved and developing systems to accurately assess the unique risks posed by project financing – particularly during the construction phase. We are also seeing fund managers with the necessary specialist skills to do this winning mandates to invest funds on behalf of insurers and pension funds.
Since the onset of the financial crisis, the most significant move so far in Europe to strengthen the link between project bonds and infrastructure finance is the Project Bond Initiative – known as the ‘Initiative’. It is run by the European Commission in partnership with the European Investment Bank.
Before the financial crisis, capital markets already played a role in infrastructure project financing, particularly in the UK. But in most cases, such financing was ‘wrapped’ by monoline insurers – which provided guarantees to issuers that enhanced their credit.
These companies have ceased to exist postcrisis, so the Initiative was set up to boost the credit quality of certain European infrastructure projects, helping them attract long-term private sector investors such as pension funds and insurance companies.
The Initiative enhances credit quality in one of two ways: (a) through the direct contribution of funded subordinated debt or (b) through contingent facilities that cover construction cost overruns or delays in achieving targeted revenues.
It is currently being piloted until the end of 2013 and being discussed on a number of transactions that may reach financial close by then.
While the loan market for project financing is starting to rebound somewhat, it is unlikely to return to funding for long-term project and infrastructure debt to the same degree as it once did.
So while project bonds will never completely replace bank financing, they will undoubtedly become far more significant. They provide the perfect opportunity for borrowers to attract another pool of liquidity for longer periods which complements the more traditional forms of project financing.
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