Spain launches first venture financed by EU ‘project bonds’

Castor gas storage.jpg

A large offshore submarine gas storage facility in Spain was the first in Europe to issue ‘project bonds’ for a total of €1.4 billion, three years after the idea was launched by European Commission President José Manuel Barroso.

Speaking at the European Forum Alpbach in Austria last week (29 August), the European economics and finance commissioner, Olli Rehn, said the large underground gas storage project in Spain recently became the first to use a project bond under the pilot phase of this joint initiative by the Commission and the European Investment Bank (see background).

The Castor project could be seen as “an encouraging sign of confidence” in crisis-hit Spain, Rehn claimed. "Successful issue by Castor of the first project bond is a welcome sign of increasing support for long-term investment essential for sustainable growth in Europe," he added.

The European Investment Bank (EIB) announced recently that the first transaction under the Project Bond Credit Enhancement initiative had successfully taken place and would benefit the Spanish gas storage project.

Located off the east coast of Spain, the Castor natural gas storage facility is expected to cover 30% of Spain’s daily gas consumption. It is being developed by ACS Group and Dundee Energy Ltd. The promoter is the Spanish Ministry of Industry.

The €1.4 billion bond issue for the Castor project was supported by a €200 million liquidity line under the Project Bond Credit Enhancement Initiative, improving its credit rating among investors. The EIB will provide a total of €500 million for the project and will also purchase €300 million worth of bonds as an anchor investor. 

“The European Investment Bank is committed to supporting investment essential for Europe’s future and congratulates Castor for successfully demonstrating how using project bond credit enhancement can enable increased support for long-term investment during challenging economic times”, said Werner Hoyer, the president of the European Investment Bank.

He said the pilot phase of the joint EIB-European Commission project bond credit enhancement initiative should add a new dimension to the EU bank’s contribution to financing infrastructure in Europe.

To date nine energy and transport projects eligible for project bond support have been approved by the EIB Board in six EU countries. These include motorway projects in Belgium, Germany, Slovakia and the UK, grid connections to offshore wind farms in Germany and the UK, and gas storage facilities in Italy and now Spain.

The Castor project is expected to be followed by additional project bonds later this year and in 2014. Under the project bond model, bonds are issued by the project companies themselves, and not the EIB or the member states. The role of the European Investment Bank is to provide credit enhancement through a subordinated instrument, either a loan or contingent facility, to support the senior debt issued by the project company.

In his 'State of the Union' address to the European Parliament in September 2010, Commission President José Manuel Barroso spoke of an initiative to establish EU 'project bonds' issued in conjunction with the European Investment Bank (EIB).

The idea of using bonds to finance the European budget was launched for the first time by former European Commission President Jacques Delors with his 1993 plan for growth, competitiveness and employment, the predecessor of the Lisbon Agenda.

But the majority of member states opposed the idea, fearing it would ultimately increase their expenditure on the Community budget.

In October 2011, Barroso mentioned a figure – €50 billion – to be raised for projects in the transport, energy and telecoms sector, using project bonds.

On 22 May 2012, the EU institutions agreed to launch the first ‘project bonds’ as a pilot project to boost investment in energy, transport and the digital economy. It was decided that the EU will set aside €230 million in guarantees and will focus on encouraging capital market investment worth more than €4 billion for transport and energy investment.

>> Read: ‘Project bonds’ launched as an experiment

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