S&P's analyst Manuel Dusina says that Italian public-private partnership (PPP) programme and ready access to the capital markets should help to encourage institutional investors to participate in the Italian project finance market.
S&P’s analyst Manuel Dusina says that Italian public-private partnership (PPP) programme and ready access to the capital markets should help to encourage institutional investors to participate in the Italian project finance market.
We believe the new laws introduce a more innovative and benign legal and fiscal regulatory regime, one that could support the development of a project bond market. This should enable Italy to tap into the increasing demand, confidence, and appetite among European and worldwide institutional investors for infrastructure assets that we’ve observed in other European markets.
The new legal regime should also help to reduce some of the costs previously associated with infrastructure investments. For example, prior to the approval of the First Growth and Development Decree on Aug. 8, 2012, unlisted issuers, such as project finance special-purpose vehicles, issuing bonds in excess of a 2 to 1 debt-to-equity ratio were charged a withholding tax on interest payable. This prevented the deduction of interest payable and made access to the capital markets onerous. And although issuers could have pursued securitization, this would have resulted in significant additional costs compared with bank financing.
The Decree also identifies international and national financial institutions that can provide project guarantees, including CDP and Servizi Assicurativi del Commercio Estero (SACE; the Italian export credit agency), along with foundations and private funds. We understand that the guarantee is only available for a specific period, likely during a project’s construction phase or until such time as the project is picked up by the concession holder. Such guarantees should in our view further support infrastructure investments funded through the capital markets because they address investors’ reluctance to invest directly in projects that are pre-completion, commonly known as greenfield projects.
However, we believe any shift to bond financing from bank loans is likely to be gradual, for two reasons: First, investors have up to now been reluctant to invest in infrastructure projects due the lack of data and their inexperience of this asset class. What’s more, the Italian project bond market remains untested and market participants will, in our view, take some time to get acquainted with the new legislation.