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Emerging Project Bond Market: Covenant Provisions and Credit Spreads

The emergence in the 1990s of a nascent project bond market to fund long-term infrastructure projects in developing countries, such as electric power plants, roads, ports, airports, telecommunications networks, and water and waste water facilities, merits attention for several reasons. First, they highlight the attractiveness of such investment opportunities that are traditionally the preserve of the public sector for private sources of capital.

Second, project bonds are potentially a major source of long-term private debt capital linked directly to economic growth and competitiveness. Third, they are a new asset class in the emerging market debt spectrum, offering asset diversification and investment opportunities particularly to institutional investors, such as insurance companies and pension funds whose long-term liabilities match the long-term tenor of project bonds. Finally, they mirror the shift in the pattern of capital flows from bank loans to publicly issued bonds.

Although the volume of capital raised through international project bonds remains relatively small, the market has gained maturity in a very short time span, delivering a series of high profile transactions such as US$1.2 billion issued by the Ras Laffan Liquefied Natural Gas project in Qatar, US$1 billion issued by the Petrozuata heavy oil project in Venezuela, and US$125 million issued by the Quezon power project in the Philippines. Today, the market encompasses a broad range of project types, issue sizes, seniorities, and maturities.

The total issuance volume worldwide has been on the order of US$25 billion (2000-2001) of which about one third is attributed to bonds issued by projects located in developing countries. The market’s long-term prospects, driven by the massive infrastructure needs in developing countries, look very promising.

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Emerging Project Bond Market: Covenant Provisions and Credit Spreads