Viveracqua Hydrobond 1 Case Study

Case Study: Viveracqua Hydrobond 1

Contents

Introduction 1

1. Benefits and risks to the eight water utilities to raise capital by this approach 2

1. The role of each party in the deal 4

1. Cash flows for minibonds and ABS 5

1. Evaluate the two pricing models 6

1. Specific risks for investors for mini-bonds 8

1. Major risks for institutional investors invest in SPV 10

1. Feasibility of Applying in Australia 11

Summary 15

Appendix 16

Reference list 19

Introduction

The Global Financial Crisis has brought huge impact on financial institutions, suffered from financial constraints, they struggled to offer sufficient capital to meet the investment demand. In order to retain infrastructure investment in a stable or upward level, eight Italian water utilities financed by pooling some minibonds that they had planed to issue together and used it as collateral for an asset-backed security on July 2014. Viveracqua Hydrobond 1, a special purpose vehicle, fully subscribed €150 million minibonds. Further €6 million injected by Veneto Suiluppo and €24 million from the eight water utilities compose the credit enhancement. European Investment Bank, together with some other investors subscribed the asset-backed security.

This report will compare the benefits and risks of financing through securitisation, and identify each party in the deal. Then the next part outline cash flows for both minibonds and ABSs. Moreover, two different pricing method would be introduced in this report, both precedent transactions and Italian Government Rate plus spread can be used to determine the right ABS coupon rate. Furthermore, risks associated with securitisation will be evaluated in the following part. Last but not least, there is a brief discussion about this financial innovation and its application.

1. Benefits and risks to the eight water utilities to raise capital by this approach

There are main benefits for companies financing through securitisation. Firstly, raising fund through securitisation have potential to reduce costs. As it is mentioned in the article, financial resources can be achieved with a relatively competitive cost in the whole capital markets (Gatti, Nobili, Massimi & Florio, 2016). During the financial crisis period, the impact of capital constrains has resulted in high demand but low supply of bank loans, which gives an upward incentive for the cost of capital. In addition, the credit enhancement by eight utilities cooperating with each other helps ABSs generate a better credit rating, which not only affect the yield spreads of new bonds, but also security prices at the announcements of rating changes (Han, Moore, Shin, 2013). As the bond yield decrease, the company would pay lower interest to bondholders. Therefore, the funding cost can be reduced through securitisation.