The Way Forward For The European Project Finance Market: An Empirical Evidence Of The Transition From Bank Loans To Project Bonds For Funding Infrastructure

The present study examines the situation of infrastructure project finance market in Europe, investigates about recent policy evolutions and attempts to answer the research question on the potential of the Europe 2020 Project Bond Initiative to offer a realistic opportunity for capital markets to complement the banking system in funding infrastructure projects. By comparing the two credit enhancement alternatives proposed by the EDB, the funded subordinated debt layer and the unfunded letter of credit, it has emerged that, while they are both credit positive, there are substantial differences in the way they affect the project’s PD and LGD during construction and operations, and eventually the rating assignment. The unfunded credit enhancement facility, contrary to the funded subordinated debt, improves the project’s risk profile also during construction and increases the liquidity endowment, allowing to meet cost overruns, replace a defaulted contractor or ensure the debt service when the project comes into difficulty. Since construction risk and improved financial coverage are major issues for bond investors, the unfunded liquidity facility can be probably considered as the most common structure through which the PBCE will be provided. The first EIB backed bond issue in 2013 by Castor Project, supported by an unfunded liquidity facility, set the ground for a new landscape for infrastructure finance and highlighted how ratings and investors protection mechanisms are paramount to create a creditor-friendly environment for the dawning European project bond market. All things considered, it can be concluded that the transition to a new equilibrium between bank funding and bond funding is likely but will take time.