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Infrastructure: A slow but steady build

The European Commission has galvanized efforts to develop Europe’s project finance bond market, but mixed fortunes in the asset class highlight just how long the road ahead is for a market still in its infancy.

Just over a year ago, Aviva Investors and a small Switzerland-based investment advisory firm called Hadrian’s Wall Capital announced the first close on an innovative new fund that, it was hoped, could help unlock the potential of Europe’s nascent project finance bond market.

The fund, called the Aviva Investors Hadrian Capital Fund 1 because it was a strategic partnership with the global asset manager, was to invest in long-dated senior infrastructure debt and ultimately provide an alternative to the monoline insurance that was once so important for project bonds.

Before the 2008 financial crisis, monoline guarantees (wraps) were a critical part of the project bond market because the credit enhancement they offered elevated the ratings of the bonds to triple A, enabling institutional investors to get comfortable taking on greenfield construction risk.

Today the monoline industry is a shadow of its former self, having all but collapsed during the financial crisis. But this in turn gave rise to the alternative Aviva Investors and Hadrian’s Wall Capital devised to create an investment fund that could perform a similar private-sector credit enhancement role.

At its simplest, their innovative solution involved splitting the investment-grade rated senior debt issued by a borrowing company into two tranches.

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