The European Investment Bank’s (EIB) project bond credit enhancement (PBCE) instrument, whether in the form of funded subordination or unfunded letter of credit, could improve a project’s credit metrics to a level in line with ratings in the A category, Fitch Ratings says. However, to achieve this, projects would also need to display a reasonably strong standalone credit profile. The PBCE is unlikely to transform an otherwise sub-investment grade rating to one in the A category.
In its report, entitled
‘EIB Project Bond Credit Enhancement Proposal’
, the credit ratings agency (CRA) says that the unfunded PBCE instrument can improve the construction phase risk profile of a project by providing additional subordinated liquidity to fund cost overruns or to replace a defaulted contractor. Also, the instrument is capable of enhancing a project’s rating profile during operations as, in the event of material stress; it can be used to partially prepay senior debt to restore cash flow coverage levels (rebalancing). Following a drawing the PBCE can be assimilated to subordinate debt, as it is repaid through a cash sweep after senior debt service. Amounts repaid can be redrawn, potentially providing future liquidity support.
The funded subordinated debt option, meanwhile, does not improve a project’s risk profile during construction and it provides marginally less liquidity support during operation. Fitch’s analysis of debt enhanced by the funded subordinated facility would follow the guidelines of the rating criteria relevant for the asset class.
The PBCE is the instrument through which the EIB, in conjunction with the European Commission, proposes to enhance the credit quality of European infrastructure projects to facilitate the capital market funding of their investment requirements. In its pilot phase, running up to 2016, the PBCE instrument is expected to be directed at supporting trans-European networks in the fields of transport and energy, as well as broadband and information and communication technology projects.
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