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Engineering the EIB bond guarantee
24 July 2011
The European Union is making a concerted effort to develop a capital markets product for infrastructure financing. Is a fresh bout of financial engineering necessary, or will government approaches to procurement and bank regulation be more important? By Paul Smith.
Perhaps there is no debate more perennial in project financing than whether the capital markets can and will supplant bank debt as a source of project funding. Institutional investors have the right time horizon to hold long-dated infrastructure debt. But in many markets banks have offered competitive tenors, and have been able to point to negative carry, construction risk and the intrusions of the ratings process as significant drawbacks.
Capital markets protagonists argue that this time is different, because of the capital constraints that Basel III could cause for banks. The new capital adequacy rules make holding long-term debt more costly. The European Union’s members’ fiscal constraints should spur them to park more assets on the balance sheets of the private sector. If the EU is to meet its infrastructure investment targets by 2020, private capital needs help to plug a funding gap. On cue, up comes the EU and...
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