The EIB's loan is often pari passu with a loan provided by commercial banks, but the Bank is usually by far the largest single lender, since commercial banks normally syndicate out their exposures. The Bank's policy is not to finance more than 50% of eligible project cost and the evaluation found that this limit was respected. However, the Bank was regularly providing very high proportions of senior debt: up to 100%.
The Bank's statute states that the interest rate on its loans "…….shall be calculated in such a way that the income there from (sic) shall enable the Bank to meet its obligations, to cover its expenses and to build up a reserve fund…….."5. With this rate-setting approach, and the Bank's AAA rating, the Bank's lending rates should therefore be lower than those of commercial banks.. "Risk Pricing" for EIB loans was introduced in 1999 to reflect the extra risk of loss in cases where normal risk-mitigation and externalisation measures are not achievable due, in particular, to market constraints. Some characteristics of the funds requested by the Borrowers noted in the evaluation were :
• Floating-rate (Euribor or LIBOR) EIB funding was swapped by intermediary banks into fixed-rate funding, although the Bank could have provided fixed-rate funding itself. This may be partly because the Bank requires a higher level of guarantee cover for fixed-rate operations, to take into account the higher breakage costs associated with early repayment.
• The use of intermediary currencies instead of funding in the desired currency. In one case, a loan in USD was swapped into EUR. By providing USD it was possible to create a greater financial benefit than had the local currency been used. Despite swap costs incurred, the benefit to the project was still greater than had the loan been denominated in local currency.
It is normal for most of the debt interest costs on a PPP project to be either hedged or fixed throughout the life of the loan. This was not the case for a road infrastructure project, a risk which was not recognised in the financial appraisal of the project. Similarly, an urban motorway was at risk from exchange-rate movements between its debt (in ECU and other pre-Euro currencies), and local currency-based revenues, but again the point was not analysed at appraisal.
It was noted that the Bank is prepared to modify the standard reimbursement structure of its loans to suit the needs of the project. Typically this involves accepting lower levels of repayment in the early years, to ease the project's cash-flow, with acceleration after commercial bank loans have been repaid. In one extreme case, the loan is a bullet loan with capitalisation of all interest payments to ensure the financial sustainability of the project. A side effect of this approach was its impact on the Bank's exposure vis-à-vis the Bank's limit on the proportion of project cost it will finance. While the Bank's initial loan of EUR 275 million was well below the 50% maximum, the Bank's exposure to the project reaches some EUR 797 million, against project costs, including IDC, of EUR 871million.
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5 Article 19, EIB Statute