The following is an illustrative and simplified example of how the Europe 2020 Project Bond initiative could function at the level of the project and capital market investors.
A transport project, such as a section of railway network, is planned by a group of companies (sponsors) and tendered by public authorities. The sponsors create a project company to raise the financing, construct and operate the railway network for a period agreed with the public authorities. The sponsors provide own funds to the project company in the form of equity and shareholder loans. The remaining financing is raised by the project company in the form of debt, traditionally in the form of a bank loan.
Instead of using traditional bank lending, the project company could raise the senior debt through project bond issues. Capital market investors would buy the bonds if an investment grade credit rating, preferably at least A-, could be achieved.
In the pilot phase of the Europe 2020 Project Bond initiative, the EIB would provide a loan or guarantee (EIB facility) to the project company in order to raise the likelihood of timely repayment of principal and interest to bond holders during the lifetime of the bonds (therefore reducing the risk of such bonds and, consequently, increasing their credit rating).
The facility could cover all project-related risks affecting the cash flow generation from the start of the operating period, as well as any funding shortfall during the construction period.
It would be sized project by project as a percentage of total bond funding subject to a cap, for instance 20% of the overall senior debt and could take the form of a credit line which could be drawn upon either to service senior bonds or to meet funding shortfalls during the construction phase.
Once drawn upon, the EIB facility would take the form of subordinated debt. This debt would be reimbursed by the project company over time from the cash resources available after senior debt service, but prior to payments to equity and related financing (shareholder loans, other subordinated loans).
Finally, the project company benefiting from the EIB credit enhancement would have to pay a fee to the EIB which would be determined in accordance with EIB's standard remuneration policy.