eib financing for infrastructure under efsi · 2017-06-19 · project risks/bankability ....
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CEF Energy Info day, 14th June 2017
Matthieu Bertrand EFSI and CEF Mandate Officer
Mandate Management Department EIB Directorate for Operations
EIB financing for infrastructure under EFSI
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3 ways to tackle the investment gap
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Aim: to mobilise at least €315 billion in investment across the EU
Give investment advice • European Investment
Advisory Hub • European Investment
Project Portal
Mobilise finance for investment • European Fund for Strategic Investments • Cooperation with National Promotional Banks
Investment Plan for Europe
Create an investment friendly environment • Improving the
regulatory environment
• Structural reforms
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Risk Sharing under EFSI
Debt Portfolios
EU Grt
EU risk
EIB risk Residual Risk
Tranche (RRT)
Portfolio First Loss Piece
(PFLP)
EIB funding
Equity Portfolio +
EU Grt
EU risk
EIB risk
Pari Passu Financing
EIB funding
Pari Passu Financing
EFSI is NOT a fund or a separate legal entity from the EIB It is a contractual arrangement between EC & EIB Group EU guarantee (16bn) is a portfolio guarantee – not a guarantee of individual transactions EIB is also contributing to EFSI Risk-bearing capacity (€5bn for equity and SMEW operations) All EFSI operations are EIB or EIF (EIB Group) operations – residual risk taken by EIB
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EFSI and EIB Special Activities
EFSI mobilises investment by increasing the availability of high risk EIB financing (Special Activities) to economically viable projects, addressing their financing needs and crowding-in other financiers.
“EIB Special Activities” refers to EIB operations which are riskier than those normally accepted by the EIB. Special Activities require significantly higher resources.
Prior to EFSI, the annual value of SA financing was ~ EUR 4bn/year, often with the support of EU Financial Instruments. With EFSI, target is EUR 20bn/year. It allows the EIB to (e.g.) reach new clients, develop new products (risk-sharing) or offer longer maturities, effectively addressing market failures and sub-optimal investment conditions.
The EIB’s willingness to accept higher levels of risk is linked to the individual needs / merits of the operation, including the availability of other resources.
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Typology of possible financial support according to project risks/bankability
19/06/2017 European Investment Bank Group 5
Degree of bankability of the targeted projects
Revenues cannot support initial investment costs/debt
Bankability – limited
risks
Bankability – higher risks
Too risky to attract financing at acceptable terms without high risk coverage
Grants
Investment grants,
operating grants
Repayable grants,
subsidised interest rates
EIB/EC Financial
instruments with high risk coverage by
EU (InnovFin – EDP)
EIB own-risk loans or guarantees
EFSI loans or equity InnovFin Products
CEF Debt Instruments
EFSI Investment Platforms attracting investors with an EFSI
layer and a Portfolio FLP (combination with EU funds?)
Risk-sharing Mandates EIB/EC Special activity category
Not for EIB Group
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Key feature of EFSI: its additionality Support by EFSI of operations which address market failures or sub-optimal investment situations
Operations which could not have been carried out or not to the same extent without EIB support
Higher risk profile than EIB normal operations and EFSI portfolio should overall have a higher risk profile than EIB normal portfolio
Projects with a risk corresponding to EIB Special Activities are considered to provide additionality
Projects that are not Special Activities may also be supported by EFSI if addressing the other points above
Additionality must be well substantiated in the documents provided to the EFSI Investment Committee
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Examples of approved EFSI Projects in the field of energy infrastructure
Offshore Transmission Network Round 4 (UK)
Energa Hybrid Bond (PL)
Nordlink HVDC Project (DE/NW)
Transgaz Brua Gas Interconnection Project (RO)
+ Offshore and Onshore Wind parks
+ Smart-metering projects
+ Support to local transmission and distribution infrastructure
Energy is the main infrastructure sector benefiting of EFSI
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9 •24/03/2015
after Board meetings of May 2017
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EFSI Investment platforms
What are they? Dedicated financing structures, co-financing or risk-sharing
arrangements, channeling public and private financing from entities, to finance a number of investment projects
Flexible concept With a defined geographical or sectoral/thematic scope Potential tool to use EU funds, financial instruments or national
support together with EFSI to support specific policy objective Or to facilitate/organise co-financing with NPBs
But they are not magic tools that would transform non-bankable projects into bankable projects
The EIB needs to rely on sponsors and promoters that would set up such structure
The EIB Advisory services, including EIAH, can provide advisory services to set up such structures
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Financing of PCI energy projects
Generally financed by TSO’s on the corporate (regulated asset) balance sheet.
In more limited cases (given RAB etc. restrictions) financed on a project (SPV) basis with support from the TSO or potentially merchant risk.
Novel structures under development such as regulatory cap and floor mechanisms.
Need for CEF/EFSI financial products that can support the different forms of financing but especially corporate/RAB balance sheet funding, which accounts for the bulk of investment.
Associated tool box of financial instruments from senior loans to credit enhancement and higher risk instruments to potential equity.
Need for a wide range of financial instruments for PCI’s in energy
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EIB operations
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EIB ‘higher-risk’ debt instruments under CEF/EFSI
13 European Investment Bank
EFSI-CEF Financial Instruments
Project Finance
Corporate
Credit enhancement Project Bonds
Credit enhancement Loans
Senior Loans
Hybrid Debt products
Capital markets
Banking market
Airports
Ports
TSOs
Products
Corporates
Corporate Bond Guarantees
Corporate Subordinated Debt
Transport Authorities
9/07/2015
Senior Loans Guarantees
Project Finance Borrowers
Project Financing
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1) EIB corporate loans for energy PCI’s
Main EIB Instruments
Project Finance
Corporates
PBCE
Guarantees
Senior Corporate
Subordinated Corporate
Products
Senior Loans
Subordinated Loans
Hybrid
Seniority of product
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2) EIB project finance loans
Main EIB Instruments
Project Finance
Corporates
PBCE /SDCE
Senior Corporate
Subordinated Corporate
Capital markets
Banking market
Products
Senior Loans
Subordinated Loans
Hybrid
Seniority of product
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Project financing
Long term senior debt offered on a non-recourse project (SPV) basis
PPP/IPP type structures with underlying revenue source – potentially a regulatory income stream but also possibly merchant risk in well structured project
May also apply to large project based financing (e.g. LNG, pipelines), which use project financing techniques including long term supply/offtaker arrangements
Traditionally limited use of project financing by TSO’s given perceived complexity, costs and regulatory restrictions on ownership
7/04/2016 16 European Investment Bank
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3) Credit enhancement
Main EIB Instruments
Project Finance
Corporates
PBCE /SDCE
Senior Corporate
Subordinated Corporate
Capital markets
Banking market
Products
Senior Loans
Subordinated Loans
Hybrid
Seniority of product
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Credit enhancement (PBCE/SDCE) EIB can provide Credit Enhancement through subordinated debt to:
Ensure debt service for senior debt up to the size of the instrument.
Credit enhancement up to 3 notches equivalent/possibly above sovereign
10 PBCE deals closed to date.
SDCE allows enhancement of bank loans/combination with EIB senior loans.
Project Bonds/
Bank Loans
PBCE/SDCE up to 20% of total
senior financing
Infrastructure Project
Company (eg. PPP/PFI)
Equity
Bond Investors/ Lenders
PBCE/SDCE
18 7/04/2016 European Investment Bank
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PBCE / SDCE
Enhancement of project bonds (PBCE):
Access to new funding sources to institutional investors.
Long tenors possible (e.g. 40 years for Calais harbour project).
Enhancement of senior loan (SDCE):
Total financing cost can be more economical (depending on the project).
Improves attractiveness for senior lenders (mitigates economic risk like ramp–up risk, demand risk, etc.).
7/04/2016 19 European Investment Bank
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Project Bond - West of Duddon Sands OFTO
Signed 20 August 2015.
Electricity transmission assets connecting the 108 wind turbines of the 389MW West of Duddon Sands offshore wind farm to the UK onshore grid.
Construction completed and part of the UK regulated transmission system.
GBP 255m, publicly issued, listed, amortizing senior bond with a tenor of 19 years.
Credit enhanced by GBP 38.2m of unfunded PBCE, sized at 15% of the outstanding bond amount (amortising with the bond).
PBCE credit enhancement from Baa1 to A3
Bond priced at 145 bps over the benchmark UK Gilt rate, or 3.446%.
Third OFTO to be financed with PBCE-enhanced public bonds, circa GBP 900m of debt raised in total.
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4) Corporate Subordinated Debt
Main EIB Instruments
Project Finance
Corporates
PBCE
Guarantees
Senior Corporate
Subordinated Corporate
Products
Senior Loans
Subordinated Loans
Hybrid
Seniority of product
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3a) Corporate subordinated debt: Tailored product for Energy PCI’s: Hybrids
Main EIB Instruments
Project Finance
Corporates
PBCE
Guarantees
Senior Corporate
Subordinated Corporate
Capital markets
Banking market
Products
Senior Loans
Subordinated Loans
Hybrid
Seniority of product
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Case study: Hybrids for European utilities
Investment Rationale: Hybrid securities provide
benefits for both Corporate Issuers and Institutional Investors.
Hybrids equity recognition can be achieved in different proportions depending on the product structure.
The equity recognition provides flexibility and ratio protection for the issuer balance sheet.
Source : GS Hybrid presentation
The hybrids have become a common product for European utility corporates for credit ratio protection through equity content.
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Hybrid bonds issued by European utilities
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Why has the EIB developed a hybrid product? Utilities need to invest significant resources to maintain, expand and
interconnect the European Electricity and Gas markets.
In general, the construction phase of projects does not generate revenues and may put pressure on the corporate balance sheet.
Hybrids allow for an efficient financing alternative for projects during the construction period mitigating the debt exposure during this period.
The EIB mandates under the EFSI and CEF programs allow for higher risk taking approach.
More affordable financing for utilities type may accelerate the investment decision of utilities in new assets in line with the EFSI and CEF mandates.
EIB senior debt and hybrids products can be combined.
Hybrid offers a higher risk taking approach under EFSI/CEF with stronger credit counterparts that develop large infrastructure projects in the energy space.
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EIB hybrid concept The EIB hybrid targets full compliance with Moody's, S&P and Fitch
methodologies to achieve 50% of equity recognition.
In line with market experience the rating of the EIB hybrids is expected to be two notches below the senior debt corporate rating.
The EIB hybrid is limited in size to EUR 250m tickets.
The EIB hybrid will be flexible to offer non-callable 5, 7, and 10 years.
During the non-callable period the EIB hybrid will be priced at the Bank’s fixed rate and at floating market rate thereafter.
The EIB hybrid will be fully tradable after the non-callable period.
Standardized EIB policy clauses will be included and valid during the period the EIB holds these assets. Once sold, the EIB related clauses will not apply to new investors
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Investment rationale
EIB can provide hybrid securities as a complement to traditional lending for financing projects in the utility sector.
A hybrid product by giving partial equity recognition for 5-10 years provides flexibility/incentives for corporates who invest in projects with longer term (+ 5 years) payback cash flow.
As a balance sheet product, it also provides investment headroom beyond typical project based financing.
Can optimise WACC for issuers.
Additional issuance to match capex programme subject to corporate counterpart limits (currently EUR 250M).
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Thank you!