Debt instruments to support Infrastructure Financing ms/home/events/workshops/landscape

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1 Debt instruments to support Infrastructure Financing ms/home/events/workshops/landscape Update on the EU-EIB Project Bond Initiative Workshop Science and Technology Options Assessment Brussels, 26 September 2013

2 EU 2020 Project Bond Initiative (PBI) An EU initiative to support project bonds together with the EIB, would help address the needs for investment in large EU infrastructure projects (J.M. Barroso) Aims to revive and expand capital markets to finance large European infrastructure projects Targets infrastructure projects in the TEN-T, TEN-E and broadband communications sectors Does not imply any burden on public budgets, and should not be confused with Eurobonds Part of the wider Europe 2020 proposal aimed at re-vitalising the European economy, as well as the new approach to use innovative financial instruments The financing instruments developed under the Initiative are proposed as part of the Connecting Europe Facility (CEF) in the multi-annual financial framework Builds on existing experience with other joint EU-EIB financial instruments 2

3 Why Project Bonds? The EU economy is heavily dependent on public infrastructure in areas like energy, transport and Information and Communication Technologies (ICT) Some EUR billion of infrastructure investments are estimated for the Europe 2020 objectives until 2020 Significantly reduced availability of long term funding for infrastructure assets: - As a result of the financial crisis no new projects wrapped by monoline insurers (wrapped capital market issues a major source of liquidity for infrastructure before crisis) - New requirements under Basel 2 & 3 have put pressures on banks balance sheets This challenging environment demands more diversified and cost efficient financing sources to fill in the financing gap Need to find ways to bring capital markets back to the financing of individual infrastructure projects, without increasing direct public funding and therefore public indebtedness 3

4 PBI Pilot Phase The scope of the Pilot Phase is to test the project bond concept during the remaining period of the current multi-annual financial framework Designed to fine tune the instrument and prepare for what is expected to be a full roll out under the Connecting Europe Facility (CEF) from 2014 Aims to respond to the expectations of the institutional investors 230 million EU budgetary funds allocated Expected to stimulate up to 4.4 billion of investments with a multiplier of 19x on EU budgetary funds The Pilot Phase will be subject to interim and final evaluations by the EU The evaluations will look at, among other things, the value added, the achieved multiplier effect, the impact on projects' financial viability, volume, terms and costs of bond issuance and the effect on the wider bond markets 4

5 Delivery Mechanism EIB is providing the Project Bond Credit Enhancement (PBCE) instruments in the framework of the PBI The PBCE is designed to stimulate capital market financing by improving the credit rating of senior bonds issued by the project companies Target rating of A- or above, a level expected to be attractive to institutional investors (but not full AAA wrap, unlike Monolines) PBCE mitigates all types of project risks (construction, operations, performance, traffic etc.) Suitable for projects delivered under project finance structures, including Public Private Partnerships The appraisal and pricing of the individual projects enhanced by the PBCE will be based on EIB s traditional standards In addition to attractive pricing, EIB will also add value given its reputation and track record in screening, assessing, mitigating and monitoring project risk 5

6 PBCE an Evolution of the LGTT The PBCE has points in common with the LGTT, but it extends the reach and risk mitigation of the LGTT LGTT PBCE Credit enhancement for senior debt EU EIB joint initiative Subordinated instrument Enhancing bank loans TEN-T First 7 years of operation Traffic risk Credit enhancement for senior debt EU EIB joint initiative Subordinated instrument Enhancing Debt Capital Market financing TEN-T, TEN-E, Broadband Entire duration of senior debt All types of project-related risks 6

7 EIB PBCE Structures Funded subordinated option mezzanine loan SPV Project Costs Project Bonds Target rating minimum A- EIB Sub-debt Equity Bond Issue and underwriting Project Bond Investor Benefits Reduces amount of bond financing to be raised Reduces probability of default and loss given default during operations The EIB sub-debt participation can be combined with different types funding sources (bonds and other senior loans)

8 EIB PBCE Structures Unfunded subordinated option guarantee Bond Issue and underwriting Project Bond Investor Benefits Comes on top of a fully funded structure SPV Project Costs Project Bonds Target rating minimum A- EIB unfunded Sub-debt Equity & Quasiequity Covers funding shortfalls during construction Revolving capacity, available until the end of the project The EIB unfunded sub-debt participation can be flexibly used and structured in order to ensure target rating

9 First PBCE transaction (guarantee) Issue of the Castor Project Bond Project Overview Project Type Status Concession Grantor The Castor Project is a strategic Priority TEN-E underground gas storage (UGS) infrastructure in Spain Underground Storage Concession for the construction and operation of an off-shore underground gas storage facility Construction completed Awaiting full inclusion in the Spanish gas system expected before 30 December 2013 Spanish Ministry of Industry, Energy and Tourism Term 30 years, extendable to 50 years by 2 periods of 10years Location Essential Infrastructure for the Spanish Gas and Electricity Sectors The former Amposta (Castellón) oil reservoir that was exploited by Shell in the 1970s and 80s, situated 21 km offshore from the coast of Vinaroz Modulates and adjusts the supply and demand of the Spanish Gas System ensures the storage of minimum stock in order to guarantee the continuity of the System s gas supply, and is key for energy supply over the Spanish Mediterranean basin Source: Escal Strategic reserve It was classified as Type Urgent by the Council of Ministers in the Electricity and Gas Sector Planning report, This entails the highest level of priority, unconditionally approved and essential to the Spanish Gas System There are currently only three underground natural gas storage facilities in Spain (two offshore, one on-shore) Reduces Spain s reliance on external gas suppliers and increases its strategic gas reserves System operators legal requirement to hold backup reserves of 20 days consumption or sales Crucial to guarantee long-term development, stability and security of Spanish Energy System

10 First PBCE transaction: A successful proof of concept Project Bond main terms overview Issuer Watercraft Capital S.A.. a special purpose vehicle set up under Luxembourg Law. Project Bond size EUR 1.4bn CAPEX Total construction cost EUR 1.65bn Rating BBB / BBB+ (neg) from S&P and Fitch Basic Bond Legal Structure Tenor Orphan vehicle in Luxembourg on-loans to a Spanish SPV True long term financing with a Tenor ending in December 2034 Pricing All-in fixed coupon 5.756% Average Life 12.5 years Basic structure Single amortizing tranche enhanced by the EIB PBCE unfunded instrument Source: Escal Ranking Secured limited recourse amortising bonds Governing Law / Listing English Law ( Security Package under Spanish and Luxembourg Law) / Luxembourg Listing Joint Bookrunners Bankia, BNP Paribas, CaixaBank, Crédit Agricole CIB, Natixis, Santander, Société Génerale

11 Way forward: Building on Success CEF establishes in the multi-annual financial framework a single common financing instrument for all trans-european networks (TEN) in the sectors of transport (TEN-T), energy (TEN-E) and telecommunications CEF aims at supporting infrastructures with a European and Single Market dimension, targeting EU support on priority networks to be implemented by 2020 CEF aims at streamlining EU support to infrastructures by optimising the portfolio of instruments available and capitalising on possible synergies across the three sectors Financial support available for projects identified as Projects of Common Interest (PCI) in the relevant sectors Proposed budget of overall EUR million (EUR million for transport, EUR million for energy, EUR million for telecommunications) Enhanced reliance on financial instruments as a means to increase infrastructure funding in Europe, including continuation of PBI and LGTT instruments subject to interim and final evaluations by the EU As entity entrusted by the European Commission, EIB will manage and implement the financial instruments under CEF 03/10/2012 European Investment Bank 11

12 Thank you Nicholas Jennett Director, New Products and Special Transactions Information on PBI initiative