Insurers have urged the European Investment Bank (EIB) not to tread on their toes as they source infrastructure projects to invest in.
Over the past couple of years, under the project bond initiative, the bank has been providing subordinated debt instruments to enhance the credit quality of senior debt issued by promoters of major infrastructure projects.
This is intended to reduce potential losses and lure institutions into investing in real assets. But insurers claim that the interventions have not been targeted appropriately and that the EIB is effectively crowding out private investors.
"The problem with credit enhancement is that it deteriorates yields," Wim Vermeir, chief investment officer at Belgian insurer Ageas said at Insurance Europe's conference on 27 May. "The EIB must intervene on high-yield projects to make them marketable – if they are enhancing every single project, they crowd out institutional investors."
As of the end of 2014, five projects had received EIB support, for which the bank issued €494m ($556m) in project bonds. These included a natural gas storage facility in Spain, grid connections to an offshore windfarm in the UK, telecoms infrastructure in France and motorways in Belgium and Germany. There are other projects in the pipeline.
Insurers claim the bank is propping up projects that market participants were ready to finance by themselves. "There is not a huge pipeline of infrastructure projects in Europe and we are all fighting for the same ones," said Laurent Clamagirand, group chief investment officer at Axa.
This problem is made more acute by falling interest rates, which are drawing all kinds of investors away from government and corporate bonds into higher-yielding alternative asset classes.
Ageas' Vermeir said that banks, which retrenched from long-term lending in the aftermath of the financial crisis as they adjusted to penalising regulation, are making a comeback to long-term lending and this is weighing on yields. "At first, they have come back to short-term, but now they are back in the long-term. Sometimes we have to say that the risk-reward is not there anymore," he said.
Insurers also expressed concerns about the operationalisation of the looming EU investment plan through which the European Commission hopes to unlock at least €315bn in investment in the real economy, with the largest share coming from private players.
The EIB – and a newly created European Fund for Strategic Investments – will play a crucial role in mobilising capital by offering guarantees to investors. A portal will be created to showcase the European project pipeline.
Axa's Clamagirand said it is hard to see how things will work in practice. "How do you get the 15 multiplier? [For every euro of public money, private players are expected to invest €15.] When we ask how we can get involved, they tell us there is a portal, but the portal does not say how the EIB will be involved."
In the conference's opening speech, Sergio Balbinot, president of Insurance Europe, also urged EU institutions to focus on investments that are less suitable for the private sector. He also challenged the Commission to set up a specific work stream to examine the issue of political risk in these kinds of investments.
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