Prior to 2008, there was an active bond market for UK and international PPP projects. These bonds benefitted from a guarantee, or 'wrap', provided by monoline credit insurers. However, exposures and losses relating to certain defaulting loan products resulted in the downgrade of monolines active in the European project finance markets. Following these downgrades, investors ceased investing in monoline wrapped project bonds.
Since then, PFI projects have been largely dependent on the bank loan market as the provider of long-term debt finance. However, the Eurozone sovereign debt crisis, combined with a downturn in the global economy and new bank regulatory requirements, has had a major impact on debt markets. It has become increasingly challenging to raise debt finance for projects. The cost of long-term borrowing for infrastructure projects has increased sharply and the availability of long-term bank debt has significantly decreased. Where long-term bank finance is still available, margins demanded by the banks are often at levels which threaten the value for money of projects.
While banks continue to offer short-term loan structures, government does not believe that the refinancing risk represents value for money. Banks can, though, still play an important role in the financing of PF2 projects, whether through long-term loans or products to support institutional investment, including construction guarantees or mezzanine facilities providing credit enhancement.