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This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License
Article
The European Union’s Project Bond Credit Enhancement for Developing Infrastructure Project Finance
Author(s)
Marcin Liberadzki
Full-Text PDF
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DOI:10.17265/1537-1514/2015.07.002
Affiliation(s)
Marcin Liberadzki, Ph.D., junior professor, Institute of Finance, The Warsaw School of Economics, Warsaw, 02-513, Poland.
ABSTRACT
Private sector financing of infrastructure in Europe still falls behind pre-crisis levels. Budgetary constraints in the public sector for infrastructure financing together with banks unable to deliver the volume of debt needed for infrastructure financing create need for alternative sources of funding from capital markets. This article provides an overview of the European Commission’s Project Bond Initiative (PBI). The aim is to encourage investments in infrastructure projects by institutional investors. The study focuses on the European Investment Bank’s project bond credit enhancement (PBCE) mechanism and its regulations. Subordinated debt tranche by the European Investment Bank provides cushion for senior debt service. PBCE helps support standardization and widening of investor market. As project infrastructure is a specialized asset class and new to many investors, PBI has a vital role to play in supporting institutional investment. The European Commission and European Investment Bank with their PBI are at the forefront of initiatives to promote project bonds. China and USA are considering the provision of credit enhancements for project bonds similar to the European Investment Bank’s PBCE scheme. Then implementation of the pilot phase of this initiative is presented. The A11 public-private partnership (PPP) highway (Belgium) is the first green field project to reach close using the European Investment Bank’s PBCE scheme. As this example shows, the credit enhancement received three notches uplift to A3 (by Moody’s) and project bond holders accepted 30 years tenors. The most viable use of European Investment Bank funds would be to use unfunded guarantee facility.
KEYWORDS
project bonds, credit enhancement, project bond credit enhancement (PBCE), public-private partnerships (PPP), project finance, European Investment Bank
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