Wave of investment in project finance bonds to drive funding for schools and hospitals, predicts ratings agency

Standard & Poor's (S&P) said "curtailed bank lending" and an "increased appetite for infrastructure assets" has driven a rise in project finance bonds issuance in Europe, the Middle East and Africa (EMEA). The capital market is the market for medium and long-term securities.

"After a long hiatus, project finance companies in EMEA have this year issued a significant amount of new capital market debt," S&P said in a report seen by Out-Law.com. "A number of the transaction structures adopted have been proven viable from a funding perspective. This is important for the market's resilience and competitiveness because it provides project sponsors with a number of different avenues to access the capital markets."

"Thanks to a number of Government and non-government initiatives reviving investor appetite for infrastructure debt, we believe the project finance sector will enjoy a buoyant 2014. Social infrastructure will likely take centre stage, with schools and hospitals, and other assets such as transportation and renewable energy projects, being more readily financed with capital market debt. As a result, our outlook on the industry for the rest of the year is stable," it said.

Last year the European Commission and the European Investment Bank (EIB) signed an agreement to cooperate on a pilot project bond initiative. In July it was announced that a project bond issued by the EIB under the scheme had led to investment in an under ground gas storage project in Spain.

Project bonds are private debt issued by a project sponsor, usually a private company or a special purpose vehicle (SPV) created by one or more companies to control a specific project. When raising financing through a project bond, the company or SPV issues two 'tranches' of debt – 'subordinated', which bears the first losses, and 'senior' debt. Under the EU initiative the European Investment Bank (EIB) takes on the subordinated debt with EU funds used to cover part of its losses in the event of project failure.

The scheme is designed to reduce the credit risk attached to the 'senior' debt, as investors will be repaid first in the event of project failure.