Originally published 9 March 2011
On 28 February 2011 the European Commission launched a public consultation on the "Europe 2020 Project Bond Initiative" (the "Initiative") aimed at boosting the funding of projects with long-term revenue potential in line with the Europe 2020 policy priorities. Its objective is to help private project companies to attract capital market funding from investors such as pension funds and insurance companies. The Energy sector has been specifically highlighted as a key area for the initiative.
Background
Project bond issuance has come to a halt as a result of the
financial crisis. In addition, long-term investors, notably pension
funds and insurers, lack the appetite for the diversity of project
risks and currently do not have the specialist expertise required
to appraise projects and carry out the resulting analytical and
administrative follow-up tasks which used to be performed by
specialist insurance providers known as monolines.
Banks face capital and liquidity constraints. Multi-lateral lending
institutions, in particular the European Investment Bank (EIB),
have stepped in to bridge the financing gap temporarily, but cannot
continue to do so single-handedly.
Initiative
The principal idea behind the Initiative is to provide EU
support to project companies issuing bonds to finance large-scale
infrastructure projects. The Commission's key role will be
risk-sharing with the EIB (or other financing partners), enabling
them to provide guarantees or loans to support such bonds.
It is intended that the Initiative will attract additional private
sector financing of individual infrastructure projects through the
capital markets with the help of project finance techniques that
will rank the future claims on a project's cash flows in order
of seniority. Whereby senior claims are served before subordinated
claims, which in turn are repaid before equity holders.
By providing support at the subordinated level, the Initiative
would absorb much of the risk of insufficient cash being available
to service the senior debt, thereby raising its credit quality.
This is known as "credit enhancement".
The Initiative would be available to those projects that are
economically and technically sound and cost effective and that have
a real prospect of financial viability.
The Initiative would result in reduced funding costs for projects
with longer maturities, while meeting the demand of institutional
investors (such as pension funds and life insurance companies) for
stable, long term assets.
Renewable Energy
It is estimated that in the energy sector public and private entities in the Member States will need to spend around €400 billion on distribution networks and smart grids, another €200 billion on transmission networks and storage as well as €500 billion to upgrade and build new generation capacity between now and 2020.
In the renewable energy or low carbon sectors, a challenge arises when the underlying infrastructure projects use untested technologies or are located in a new market, have uncertain operating costs or when the financing cannot be obtained at reasonable cost. However, certain classes of renewable energy projects may have the required characteristics.
Consultation
The purpose of the consultation is to obtain market
participants' and decision makers' feedback on the chosen
mechanism and its essential terms and conditions and to gauge
demand for the initiative in terms of market volumes and the depth
of the investor base.
In addition, the Commission, together with the EIB, intends to
organise a conference on 11 April 2011 in Brussels to address a
number of the questions raised in the consultation paper. Those
questions include:
1) Is the chosen mechanism likely to attract private sector
institutional investors to the sectors of transport, energy and ICT
in particular? If you are an investor, would you be prepared to buy
such project bonds?
2) Are there other sectors with large-scale infrastructure
financing needs that should be included?
3) Would the credit enhancement facilitate/accelerate the
conclusion of financing packages?
4) What minimum rating of the bonds would be sufficient to attract
investors?
5) What degree of credit enhancement would be necessary to achieve
this rating?
6) Which impact would the Initiative have on financing costs and on
maturities?
7) Is it essential that a single entity acts as controlling
creditor?
Implementation
The contributions from stakeholders to the consultation paper received by 2 May 2011 will directly feed into the reflection on the design of the Initiative. The aim is to have a fully-fledged proposal ready in June 2011 in the context of the next Multiannual Financial Framework with the intention of having the Europe 2020 Project Bond Initiative fully operational in 2014.
Environmental Bonds 2011 - London, 14 March
Finally, we would like to remind you about the Environmental Bonds 2011 Conference which is taking place on Monday 14 March at the Guildhall, London. At this conference an expert panel of speakers will review and explain the latest thinking on how the bond market could help attract $billions of additional capital to tackle environmental challenges.
For further information or advice, please contact:
Michelle Thomas
Partner, Head of clean energy and sustainability
Tel: 0845 498 7553
michellethomas@eversheds.com
Paul-Michael Rebus
Partner
Tel: 0845 497 4511
paul-michaelrebus@eversheds.com
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
