If you like Italian mineral water, maybe you’d also enjoy an Italian hydrobond. It won’t rehydrate you or go nicely with a fettucine Alfredo, but it might be a good long-term investment and it will keep water prices under control for the consumer. “It’s a sexy name for something quite plain,” says Thomas van Gilst, head of water security and resilience at the European Investment Bank. “The idea was to make a product that institutional investors would want to buy.”
Thomas and colleague Patricia Castellarnau, an economist, tell the story of the creation of the hydrobond on A Dictionary of Finance podcast. It all started with a group of small Italian water companies and the financial crisis.
The companies needed to invest for the long-term in expensive water infrastructure. But because of the financial crisis and because they were relatively small companies banks would only lend to them for the short-term.
That was a problem. If the companies took those short-term loans, they would have to increase charges to their customers to pay back the money quickly, rather than spreading the cost over many years.
So the EIB figured out a way to help.
By packaging the smaller companies’ notes into a single, bigger bond, the deal attracted institutional investors, such as pension funds, which otherwise wouldn’t have financed the water companies.
Thomas and Patricia have worked on hydrobonds that support EUR 500 million of investment so far, with deals signed in the last four years. “If the companies hadn’t done this, it would’ve taken much longer to implement their investment programmes,” says Patricia.
On the podcast, Thomas also fills us in on the economic implications of lack of water security. He points out that 90% of economic activity stops within a couple of days if there’s no access to water.
How long could you stay at work without water? On the podcast we decided we’d head home after about half an hour without lubrication. Let us know on Twitter if you could last longer. Tweet us @EIBMatt or @AllarTankler. We’d also love to hear other questions you’d like us to pose about financial issues.
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