UK: Europe 2020 Project Bond Initiative

Last Updated: 10 March 2011
Article by Michelle T. Davies and Paul-Michael Rebus

Originally published 9 March 2011

On 28 February 2011 the European Commission launched a public consultation on the "Europe 2020 Project Bond Initiative" (the "Initiative") aimed at boosting the funding of projects with long-term revenue potential in line with the Europe 2020 policy priorities. Its objective is to help private project companies to attract capital market funding from investors such as pension funds and insurance companies. The Energy sector has been specifically highlighted as a key area for the initiative.


Project bond issuance has come to a halt as a result of the financial crisis. In addition, long-term investors, notably pension funds and insurers, lack the appetite for the diversity of project risks and currently do not have the specialist expertise required to appraise projects and carry out the resulting analytical and administrative follow-up tasks which used to be performed by specialist insurance providers known as monolines.

Banks face capital and liquidity constraints. Multi-lateral lending institutions, in particular the European Investment Bank (EIB), have stepped in to bridge the financing gap temporarily, but cannot continue to do so single-handedly.


The principal idea behind the Initiative is to provide EU support to project companies issuing bonds to finance large-scale infrastructure projects. The Commission's key role will be risk-sharing with the EIB (or other financing partners), enabling them to provide guarantees or loans to support such bonds.

It is intended that the Initiative will attract additional private sector financing of individual infrastructure projects through the capital markets with the help of project finance techniques that will rank the future claims on a project's cash flows in order of seniority. Whereby senior claims are served before subordinated claims, which in turn are repaid before equity holders.

By providing support at the subordinated level, the Initiative would absorb much of the risk of insufficient cash being available to service the senior debt, thereby raising its credit quality. This is known as "credit enhancement".

The Initiative would be available to those projects that are economically and technically sound and cost effective and that have a real prospect of financial viability.

The Initiative would result in reduced funding costs for projects with longer maturities, while meeting the demand of institutional investors (such as pension funds and life insurance companies) for stable, long term assets.

Renewable Energy

It is estimated that in the energy sector public and private entities in the Member States will need to spend around €400 billion on distribution networks and smart grids, another €200 billion on transmission networks and storage as well as €500 billion to upgrade and build new generation capacity between now and 2020.

In the renewable energy or low carbon sectors, a challenge arises when the underlying infrastructure projects use untested technologies or are located in a new market, have uncertain operating costs or when the financing cannot be obtained at reasonable cost. However, certain classes of renewable energy projects may have the required characteristics.


The purpose of the consultation is to obtain market participants' and decision makers' feedback on the chosen mechanism and its essential terms and conditions and to gauge demand for the initiative in terms of market volumes and the depth of the investor base.

In addition, the Commission, together with the EIB, intends to organise a conference on 11 April 2011 in Brussels to address a number of the questions raised in the consultation paper. Those questions include:

1) Is the chosen mechanism likely to attract private sector institutional investors to the sectors of transport, energy and ICT in particular? If you are an investor, would you be prepared to buy such project bonds?

2) Are there other sectors with large-scale infrastructure financing needs that should be included?

3) Would the credit enhancement facilitate/accelerate the conclusion of financing packages?

4) What minimum rating of the bonds would be sufficient to attract investors?

5) What degree of credit enhancement would be necessary to achieve this rating?

6) Which impact would the Initiative have on financing costs and on maturities?

7) Is it essential that a single entity acts as controlling creditor?


The contributions from stakeholders to the consultation paper received by 2 May 2011 will directly feed into the reflection on the design of the Initiative. The aim is to have a fully-fledged proposal ready in June 2011 in the context of the next Multiannual Financial Framework with the intention of having the Europe 2020 Project Bond Initiative fully operational in 2014.

Environmental Bonds 2011 - London, 14 March

Finally, we would like to remind you about the Environmental Bonds 2011 Conference which is taking place on Monday 14 March at the Guildhall, London. At this conference an expert panel of speakers will review and explain the latest thinking on how the bond market could help attract $billions of additional capital to tackle environmental challenges.

For further information or advice, please contact:

Michelle Thomas
Partner, Head of clean energy and sustainability
Tel: 0845 498 7553

Paul-Michael Rebus
Tel: 0845 497 4511

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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