The €1.4 billion (US$1.85bn) project bond issue for the Castor underground gas storage project in Spain closed in the July of 2013, and was the first project to close under the European Commission and European Investment Bank’s (EIB) project bond initiative.

Background

IJ News reported the opening of the bond issue earlier that month, which refinanced an earlier transaction in 2010 for the project. 

Société Générale's Matthew Vickerstaff said that “2010 was actually a pretty tricky time to put a complex, technically challenging deal in place…it did stretch the bank market, but we closed it successfully”. That deal saw Banesto Santander, Caja Madrid, Credit Agricole, Société Générale  WestLB, BayernLB and Natixis heading up a 12-strong team of MLAs.

Castor UGS will be a 1.3 billion cubic metre storage facility based on a depleted oil reservoir 21km offshore Barcelona [Projects Database].

The bond

Its objective, in the words of the EIB, “is to stimulate capital market financing for large-scale infrastructure projects in the areas of Trans-European networks in transport and energy, as well as broadband telecommunications. The initiative is designed to facilitate eligible infrastructure projects in attracting additional long term private finance from institutional investors such as insurance companies and pension funds.”

This is done by providing credit enhancement to project companies raising senior debt in the form of bonds to finance infrastructure projects. The improved credit quality of the bonds will support their placement with institutional investors.

For the EIB's pilot transaction, Spain was chosen. Currently facing a troubled economic climate and power market, the Castor project was nonetheless viewed as a watertight choice.

The transaction

Under the EIB/EU scheme, the bonds were issued by the project developer, with the EIB providing a €200 million liquidity line to support the senior debt and boost its credit rating. The books closed in July and the deal settled on the 2 August 2013. BNP Paribas, Credit Agricole CIB, Bankia, CaixaBank, Natixis, Santander GBM and Societe Generale were the banks leading the deal.

“The first transaction shows the ability for the initiative to be a success,” Cormac Murphy, who led the EIB’s project bond credit enhancement programme, told IJ News.

The pricing on the amortising bonds, which mature in 2034, is 5.756 per cent. The average weighted life is 12 years. The bonds have been rated BBB+ with Fitch, a notch above the Spanish sovereign rating.

The order book is comprised of:                

• 61 per cent institutional investors
• 25 per cent agencies - including the EIB, which will take a €300 million senior debt slice
• 10.2 per cent fund managers
• 3.9 per cent banks

The geographic makeup of the investors is:

• Germany: 28 per cent
• Benelux: 23 per cent (this includes the EIB investment)
• Spain: 18 per cent
• France: 11 per cent
• UK: 10 per cent
• Italy: 10 per cent

The EIB said of the institutional investors, insurance companies in particular had shown a strong interest. “The long tenor was a good fit for the insurers…they were active followers of the initiative,” said Murphy. The EIB’s credit enhancement covers construction risk up to 20 per cent.

Additional project bonds are planned to be launched before the end of the year. These include:

• A gas storage project in Italy
• Offshore wind grid connections in both the UK and Germany
• Motorway projects in Germany and Slovakia

The projects must reach financial close by the end of 2016.

The future

The EIB said it was hopeful that the bond iniative would establish itself as “a new asset class providing diversification and a strong credit rating.” Vickerstaff added that the deal strucutre looks set to replace the monoline wraps of yesteryear. “Most of the monolines are no more. I don’t see the monolines being a major player…they’ll do one deal maybe once a year or every two years. I think the likely result is that the banks will provide credit enhancement during the construction phase and then it will move into a fixed rate project bond, or the investors themselves will take the construction risk, which the likes of Aviva and AXA have done.”

“Castor has opened the door to prove the concept,” Murphy said. Vickerstaff concurred. “This is not one of your normal deals. Launching in July and closing in July never happens, but it just shows the strength of commitment. The stars were aligned and the very strong drive and decision making was instrumental in people moving heaven and earth to get the deal done.”