The success of the European Investment Bank’s (EIB) recently approved project bond programme will depend on the efficacy of the first deal template, lawyers have said. Following parliamentary approval this month, the pilot phase of the EU 2020 Project Bond Initiative’s (2020) will launch this summer. Up to €230 million is to be deployed by the EIB during this phase, and that has been at the forefront of sponsors’ minds. In certain industries, the public sector is requiring private sector bidders to use the EIB’s 2020 support.
While the programme is expected to ultimately succeed in establishing capital markets as a more mainstream source of project finance, much is dependent on a successful blueprint structure.
“I think it will work eventually. But there will be this bedding in period, and the first deal or two will be absolutely critical,” said Freshfields Bruckhaus Deringer partner Nick Bliss.
Linklaters’ Adam Fogarty agreed, adding that investor appetite must also gain momentum. “Investors are still rightly cautious about new products and structures which are untested,” he said. “So we have the typical chicken-and egg-scenario; it’s just getting that first deal or two away.”
How the first 2020-supported securities address bondholder voting and intercreditor arrangements with the EIB will top the list of deal terms being watched by investors.
These deal mechanisms are expected to signal how securities facilitated by 2020 will be structured going forward. But before this blueprint arrives, the market seems receptive.
Bliss believed investors were pretty positive about them, by and large - so long as the correct credit rating was achieved.
According to Standard & Poor’s managing director Mike Wilkins, that credit rating is a single A.
“There is an expectation among investors that they will need a single A credit rating, which lines up with what the EU and EIB is doing through their 2020 initiative,” Wilkins said. “The key issue is whether you can get to single A.”
The credit enhancement, debt leverage and other requirements will change from project to project to reach this goal. “It will be trial and error to some extent,” said Wilkins. Based on the EIB’s work to date, he understood the EIB to be on course in this regard.
Modernising voting
Effective bondholder voting has been one of the sector’s lingering questions since the monolines disappeared nearly five years ago. Linklaters, and now other firms, have developed the project agent concept to assist in this – and other – aspects of project bond operation and monitoring. However the correct project has not emerged to test the mechanism.
Short of that, trends have emerged in how bondholder voting is dealt with in deal documents.
Fogarty said recent multi-source infrastructure deals in the UK had certainly tried to develop a more active – and more modern – bondholder voting mechanic. “For example voting through clearing systems, short response times, and snooze-you-lose provisions that prevent unresponsive creditors from holding up the process,” he said.
But the real testing ground for these provisions is in a project’s construction phase, when waivers and consents are required. Since the monolines collapsed, no European project bond has taken greenfield risk. The instrument has been used only for brownfield projects or refinancings, for example the British Ports Authority deal.
Both brownfield and greenfield projects have shown interest in applying for 2020 support in the pilot phase, however the EIB is expected to start with deals approaching completion. Bliss believes an infrastructure project to be the programme’s first.
Other solutions
While 2020 is expected to succeed in diversifying project financing structures, other market participants are working towards the same goal.
Hadrian’s Wall Capital offers a similar – and in some ways better – solution to that provided by 2020. On top of credit enhancement it offers other functions performed by the monolines, such as bondholder representation.
Banks are also trying to re-find their place in the market by leveraging off their modelling, advisory and analysis abilities. These are their strengths that can’t easily be offered in the context of non-bank funding.