A7 extension: first financing operation in Germany with EU project bonds
- Release date: 27 August 2014
- Reference: 2014-182-EN
The European Investment Bank (EIB) is providing some EUR 170 million for a central stretch of the A7 motorway, which is being financed by means of a project bond. Firstly, the EIB is providing a subordinated financing tranche (Project Bond Credit Enhancement, "PBCE") under its Project Bond Initiative, which has considerably improved the risk profile for capital market investors in the project. Together with institutional investors the EIB also invests in bonds issued by contractors.
This is the first project to be implemented under the European Project Bond Initiative in Germany.
EIB Vice-President Wilhelm Molterer stated that the conclusion of the financing agreement sent an important signal to private investors in particular: “To make Europe’s infrastructure competitive, investments of a scale that cannot be effected by the public sector alone, are required. The repeated successful implementation of the principle of PPPs in motorway construction (A-model) in Germany guarantees the competitive integration of the construction industry and financing banks. By optimising the financing cost, the EIB has always played an important role in PPP projects. However, the A7 is unique in this respect insofar as the project company can finance itself directly on the capital markets with the support of the EU Project Bond Initiative, which benefits centralised infrastructure projects by improving the rating of the project companies. Institutional investors looking for long-term, reliable and attractive investment opportunities also benefit.”
This financing operation concerns the main road link between Denmark and Germany. As part of the trans-European road network (TEN-T) the A7 is a key component of Europe’s transport network. This is one of the pilot projects for credit enhancement under the EU’s 2020 Project Bond Initiative. This common instrument of the EIB and the European Commission aimed at facilitating capital market financing via project bonds can only be used in support of TEN-T, TEN-E (energy) or ICT broadband projects.
The project will be implemented as a public-private partnership (PPP) in the German transport sector. For the actual construction element a special purpose vehicle is created. It acts as general contractor and benefits from the credit enhancement instrument. The public partner is DEGES (Deutsche Einheit Fernstraßenplanungs- und -bau GmbH), which is the project promoter representing the Federal Republic of Germany via the Federal States of Hamburg and Schleswig-Holstein. DEGES is also responsible for procurement. The contractor is a consortium led by the construction company HOCHTIEF.
The EIB is providing a subordinated loan of around EUR 90 million for the project, representing about 20% of the volume of the senior debt through the issuance of capital market instruments. The EIB and the European Commission share the risk and benefits of the instrument on a portfolio basis. The European Investment Bank is also one of the key investors in the project bond, on the same level as other capital investors.
The project company is paid on the basis of the infrastructure’s availability (“availability model”). The fee therefore depends chiefly on the extent and quality of the road section made available for use by motorists. Compliance with the contractual requirements ensures that the contractor receives the full availability payment as agreed; in the event of non-compliance, a deduction is made.
The proposed extension concerns an approx. 65 km long section between the Bordesholm junction in Schleswig-Holstein and the Hamburg Nordwest junction. This section will be widened from four to six lanes and over a 500 m long stretch to eight lanes. During the construction phase, scheduled for completion by 2018 at the latest, traffic will be maintained. Capacity expansion in this important European corridor (TEN-T Corridor 5, Scandinavia- Mediterranean) will ease what has hitherto been a traffic bottleneck. By speeding up traffic flow and improving safety along this key economic artery, this project will make a significant positive contribution to the economy. The swift implementation of the project as a PPP will make a decisive contribution to its positive impact.