Project bonds and beyond

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The first application of the EIB PBCE to a project with demand-risk could prove a slow-reaction catalyst for change across the project, export and agency finance market.

On April 13 Concessioni Autrostradali Venete (CAV) closed a 14.7-year €850 million ($960 million) amortising bond refinancing for its Passante Di Mestre (Venice ring-road) toll road concession. The deal is a first on a number of levels, but most significantly it features the first use of the EIB project bond credit enhancement (PBCE) tool for a project with demand risk.

Project bonds have long been touted as the solution to the uncertainty at the heart of the loans-based project, export and agency finance market – how to match the long-tenor off-balance sheet debt requirements of developers and big-ticket equipment buyers to the short-tenor fundraising available to banks.

Despite the project bond logic – a natural match between the tenor preferences of both borrower and lender – the annual volume of project bonds, and bond take-outs of loan financings post-construction, is miniscule in comparison with traditional project and export loans.

The lack of uptake is not due to lack of appetite from potential bond investors. With returns from Gilts and US Treasuries having been at record lows in recent years, the infrastructure market has grown in popularity with investors looking for long-term predictable returns.

But therein lies the problem. Since the demise of monoline wraps, and apart from a few highly specialised funds, investors shy away from a large portion of the project and export market - financings with intrinsic demand-risk.

That lack of appetite compounds a further problem for sponsors - with bank balance-sheets being squeezed by Basel 3, more banks are peddling a return to miniperms with a view to taking less risk and generating potentially lucrative arranger fees from post-construction take-out financing in the bond market.

In addition, export credit agency budgets are coming under even greater pressure as more borrowers in big-ticket sectors like oil and gas suffer downgrades on the back of the global commodities pricing slump. So a move to bond take-outs with minimal ECA cover would stretch those budgets much further.

But while the project bond refinancings are sound for schemes with guaranteed income streams, the structure leaves a range of deals featuring demand risk - toll roads with traffic volume risk being just one example - with limited options in terms of lenders.

Consequently, the departure by the EIB into what is effectively a partial bond guarantee against demand risk could prove the seminal deal for a range of new risk mitigants designed to pull investors into bond take-outs – innovations that many commercial banks have been lobbying ECAs and multilaterals for.

The EIB PBCE aspect to the Passante di Mestre bond is not the only innovation in the deal. The refinancing is also the first to close under Italy’s new project bond regime, which has negated past tax and regulatory hurdles and made the structuring of security packages a much simpler process. Under the new rules a single entity can be appointed as representative for all the bondholders thereby negating the need to re-identify creditors every time the security is transferred in the future.

The 14.7 year issue priced on April 6 at 185bp over mid-swaps with a coupon of 2.115%. The first principal repayment on the bond will be in June 2016, and it amortises until it is fully repaid in December 2030.

Banca Imi, BNP Paribas, Royal Bank of Scotland, Societe Generale and UniCredit were bookrunners and arrangers for the issue which was sold in two tranches with identical terms. Allianz Global Investors took the entire €400 million on the first tranche. The remaining €430 million tranche went to eight investors which included Generali and SCOR.

The CAV consortium - which is owned by the Veneto Region and the Italian State Road Company ANAS - built the 32km stretch of the A4 motorway between 2006 and 2008 at a cost of €1 billion. The sponsor has a concession for up to 2032 leaving a two-year tail before the bonds mature in 2030. The bypass has been in operation since 2009, consequently investors had six years of proven traffic data as added comfort on top of the EIB guarantee.

The proceeds refinance project debt from the original financing for the €1 billion project – specifically €332 million provided by Cassa Depositi e Prestiti and a €457 million sponsor loan from ANAS.

The EIB's PBCE guarantees 20% of the bonds through a letter of credit agreement to cover debt servicing which equates to €166 million in total. If it ever has to be drawn, the letter of credit is subordinate to the senior notes. According to Moody’s the PBCE protection gave CAV a one-and-a-half notch uplift on its independent credit quality. 

Given the number of firsts the bond incorporates it is no surprise it took around two years to come to market. Banks and law firms has to put pressure on the Italian government to reform the project bond law to get the deal away and a host of technical consultants were involved in evaluating creditworthiness.

Steer Davies Gleave provided technical and traffic advisory with Aon as insurance advisor. Allen & Overy advised the bookrunners on English law and Bonelli Erede on Italian law. Clifford Chance was legal counsel to the EIB while Gianni, Origoni, Grippo, Cappelli & Partners advised the issuer.

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