Breaking New Boundaries

Abstract

The innovative Essential Public Infrastructure Capital II (EPIC II) securitization will allow Depfa Bank, the originator and servicer for the transaction, to transfer the credit risk of a pool of PPP infrastructure loans, thereby providing regulatory capital relief, enhancing the bank's return on equity, broadening the investor base for infrastructure financing paper, and further refining the template for future securitization of infrastructure loans. The EPIC II transaction, like its predecessor EPIC I, is structured as a synthetic, partially funded collateralized loan obligation (CLO). Credit strengths of the transaction include geographic diversity of the loan pool; the role of Kreditanstalt für Wideraufbrau (KfW) as sponsor, collateral provider, and custodian; satisfactory project asset quality; an early redemption feature; and a structure that insulates investors from interest rate risk. Weaknesses include noteholders' exposure to the default of reference loans if the first-loss piece is insufficient to cover such default, EPIC II's ability to replenish the pool of assets in a way that would cause the weighted average credit quality to decrease, the credit risk of transportation assets in the reference pool – generally greater than the credit risk of traditional PPP availability-based projects, the limited source of cash flow for each underlying project, and uncertainty over the timing, costing, and life-cycle requirements for each project. Mitigating factors offsetting those weaknesses include rating agency credit estimates for unrated projects and the senior secured position of credit facilities in the capital structure of each project.