EU plans to create a market for project bonds to cover the €2 trillion of investment needed to upgrade the bloc's infrastructure by the end of the decade have received a positive evaluation from credit rating agency Fitch, but are unlikely to secure a top rating.
Fitch's announcement comes as a public consultation on EU project bonds draws to a close. It is set to expire on 2 May.
Project bonds have been identified as a key EU priority for the years to come to counter the negative effects of the financial and economic crises on credit markets.
The president of the European Commission, José Manuel Barroso, publicly launched the idea during his first State of the Union speech at the beginning of his second mandate in September 2010. He later reiterated his support for the initiative.
The project bonds plan seeks to boost private investors' participation in large European infrastructure schemes, such as railways, pipelines or broadband connections. Preliminary estimates point to up to €2 trillion needed by 2020.
The European Union is set to fund or guarantee part of these projects in order to reduce the risk of failure. The European Investment Bank (EIB) would play a key role in the process.
To attract private investors, such as pension funds or large insurance firms, Brussels' stated credit target for EU project bonds was 'A'. "Ideally, the rating should be around 'A' or higher to allow the debt to be financed via project bonds," reads a Commission paper annexed to the public consultation.
Although Fitch reacted in a positive manner to the EU initiative, calling it "credit positive", it expressed doubt about the rating of project bonds. "Whether or not such benefits will justify a credit rating in the 'A' category is difficult to assess at this stage," said Olivier Delfour, global head of infrastructure and project finance ratings at Fitch.
Indeed, the credit rating agency does not usually rate European infrastructure projects in its top grade. "Fitch rates most EMEA (Europe, Middle East and Africa) infrastructure transactions in the 'BBB' category," reads a special report issued yesterday (27 April) by the rating agency in response to the Commission public consultation.
"The Commission will go ahead with its plans," commented an EU official after Fitch's announcement. A comprehensive proposal on project bonds is expected in June, when the Commission will also unveil its long-term budget, which will offer a first hint of the financial resources at the bloc's disposal in the coming years.
The plan's wild card
Fitch is not the only sceptical voice in the debate over project bonds.
"At this stage, when the Parliament's calls are of a general policy nature ahead of any specific detailed proposals, there certainly are some quarters that would like a wider application of project bonds with a specific part of the EU budget allocated for this. This is easier said than done," commented Sharon Bowles, chair of the European Parliament's economics committee.
Bowles criticised the general impact of EU reform of financial rules and its alleged excessive focus on building capital buffers. "Potential investors will be wondering what credit risk will be assigned to any bonds and how that will interact with all these prudential regulations," she said.
Commenting on the Commission plan, she added: "A further element in the mix also seems to be reference to ratings, to produce an 'A' rated bond, so just as efforts are made to rely less on ratings, maybe they are coming back in somewhere else."
It also remains to be seen how project bonds will impact upon public budgets. The Commission often refers to the initiative as debt-free because investment will be recovered when projects become operational and generate revenue.
But if things go wrong, EIB money would be lost and the effect on public budgets would surely be felt, as the EIB is funded by member states.
