DEAL: UK project bond solves negative carry

Author: Tom Young | Published: 24 Mar 2014

The financing of a Scottish roads project could solve the problem of negative carry that has long blocked the infrastructure sector's funding streams.

The £175 million ($291 million) project financing has created a deferred payment mechanism to remove the negative carry that results from low interest rates and the absence of monolines. The project bonds – known as forward purchase bonds – were created for the financing of motorway improvement in Scotland and are expected to pave the way for copycat deals.

"These financings typically incur a large cost of carry, putting a real brake on the development of the capital markets," said Julian Davies, partner at Linklaters, who led on the deal. "That problem has been solved by this deferred payment mechanism."

The bonds, issued by Scots Road Partnership Finance and acquired by Allianz Global Investors, comprise half of the entire project's funding. The European Investment Bank (EIB) provided the remaining...