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IPE special report May 2018

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Italian laws to spur pension fund investment in infrastructure, says S&P

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Italian laws brought in last year to promote the development of public-private partnerships (PPPs) and give them access to the capital markets should encourage institutional investors into Italian infrastructure via project finance, according to ratings agency Standard & Poor’s (S&P).

Manuel Dusina, credit analyst at the company, said: “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 among European and worldwide institutional investors for infrastructure assets that has been seen in other European markets, he said.

The new set of laws should also help to cut some of the costs of infrastructure investments, S&P said.

Before the First Growth and Development Decree was approved in August 2012, for example, S&P said, unlisted issuers, such as project finance special-purpose vehicles, issuing bonds with a debt-to-equity ratio of more than 2:1 had to pay a withholding tax on interest payable.

This prevented the tax deduction of interest payable and made it hard to access the capital markets.

S&P said the decree also identified international and national financial institutions that could give project guarantees, such as CDP and the Italian export credit agency Servizi Assicurativi del Commercio Estero (SACE).

S&P said: “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.”

But any shift to bond financing from bank loans was likely to be gradual, it said.

Not only have investors been reluctant to invest in infrastructure projects up to now because of the lack of data and their inexperience, but the Italian project bond market also remains untested, S&P explained.

“Market participants will take some time to get acquainted with the new legislation,” it said.

Fabio Ortolani, president at Fonchim, the pension fund for the chemicals industry in Italy, pointed out that the legislative change to allow project bond issuance has not happened yet, although it is on the way.

“What is new is that pension funds have started to invest in Italian industry in another way,” he told IPE.

In Italy, a law has been passed allowing for the issuance of mini-bonds, through which investors can invest in small and medium-sized enterprises (SMEs).

This stratum of Italian industry has found it hard to borrow as banks have reined in their lending activities in the wake of the European banking crisis.

The new mini-bonds are unlisted loans, which can be packaged into funds.

In July, for example, Mediobanca announced it would launch the first mini-bond fund, to be run by Duemme SGR, part owned by the banking group.

But, having just completed an overhaul of its investment mandates, including a heavy weighting in traditional government bonds, Fonchim is unlikely to make big changes to its asset allocation in the near future, Ortolani said.

Potentially, the fund could direct some of its investment towards mini-bonds and infrastructure via the new project bonds if the market takes off, he said.

“In five to six years, we will see,” he said.

“The main reason for investing in infrastructure and mini-bonds would be asset diversification, but also mini-bonds have the potential to help good companies.”

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