* First bond under EU Project Bonds initiative
* EIB funds to lower infrastructure debt costs
* Spanish offshore gas storage first to benefit
By Owen Sanderson
LONDON, July 12 (IFR) - The first bond to be issued under
the EU's Europe 2020 Project Bond Initiative was announced on
Thursday, which could open a new era of capital markets access
for essential European infrastructure.
European authorities have been working on ways to persuade
bond investors to back infrastructure projects since 2010, when
EC president Jose Manuel Barroso proposed the initiative.
But legal documents were only put in place last year, after
they stumbled on how to structure their support, conflicting
regulation, and the European sovereign debt crisis.
Pre-crisis, bond insurers called monolines would guarantee
project finance bonds, but these institutions fell away during
the crisis, leaving only struggling bank balance sheets and
unwilling bond investors to fund infrastructure. The EU
therefore decided to step in and risk public funds to try to
reconnect the capital markets to infrastructure finance.
The new bond deal, dubbed Watercraft Capital, announced on
Thursday, will raise EUR1.434bn to fund an underwater gas
storage facility in Spain, replacing the bank loans that funded
the construction of the project over the past two years.
Lead managers BNP Paribas, Credit Agricole CIB, Bankia,
CaixaBank, Natixis, Santander GBM and Societe Generale refer to
the whole project as Project Castor.
The project will pump gas into a disused oil field developed
by Shell in the 1970s, some 20km from the coast of Valencia, and
will allow Valencia to store the equivalent of three months gas
European support comes in the form of a EUR200m liquidity
line from the European Investment Bank. This will boost the
rating of the bonds by two notches - essential to make them into
investment grade with S&P, thus expanding the universe of
possible investors way beyond high yield or infrastructure
specialists. The deal is expected to be BBB+ with Fitch and BBB
The liquidity line will not be drawn at first, but can be
used to support cost overruns in the initial project phase, and
latterly debt service shortfalls. If there is a debt service
shortfall, the EIB's liquidity line (called a Project Bond
Credit Enhancement, or PBCE) will prepay some of the bond
outstanding, deleveraging the structure.
This will be triggered if the Debt Service Cover ratio is
below 1.05 times. At this point, spare cash after paying senior
interest will be swept to pay back the EIB, with the equity
BEATING INVESTOR CHALLENGE
Despite EIB backing, the deal is still likely to remain
challenging. It is an amortising bond maturing in 2034, with an
average life of 11.5 years. This is to match the expected
cashflows from the project, and to reduce the debt burden, but
long-dated amortising bonds are rare in euro markets.
Sterling investments are frequently in long-dated amortising
format, but most euro issuance is between 5 and 10 years and in
bullet format, according to IFR data.
The Kingdom of Spain sold a 15 year bond on Tuesday - its
longest in over two years - placing the EUR3.5bn bond at 280bp
over mid-swaps. This was a signal that the market is open for
long-dated Spanish risk. The leads have been ready to launch
this deal for over a year, but have been put off by poor
conditions for Spanish sovereign risk, according to one.
This deal will certainly have to pay a liquidity premium to
the Spanish sovereign, but ought to comfortably beat the loan
margin, which started at 350bp when first extended in 2010, but
increased to 450bp, with an annually increasing cash sweep.
Bringing in the EIB brings qualitative comfort as well as a
better credit rating - because the EIB is taking a riskier,
subordinated position in the company's capital structure, this
gives investors in the senior debt comfort that the project has
had proper due diligence conducted.
EIB is also taking a separate EUR300m slice of senior debt.
Leads are roadshowing next week in Madrid, London, Paris,
Germany and the Netherlands. The equity sponsors are ACS, a
Spanish construction and engineering company, and Castor UGS, a
partnership of Canadian oil and gas company Dundee Energy and
This deal should be the first of many to benefit from EIB
credit enhancement. The remainder of 2013 is a "test phase"
where only EUR230m was available, but the scheme should reach
full capacity between 2014 and 2020. By the end of June, the EIB
board of directors had approved 9 projects which would be
eligible for credit enhancement. Alongside Porject Castor, there
is offshore gas in Italy, motorways in Slovakia, Germany,
Belgium and the UK, and grid connections in Germany and the UK.