“Project bonds are capital market instruments used to fund or refinance project assets….” In recent years, however, project sponsors have been increasingly focused on the need to free up bank lending capacity that may be locked up in current projects in order to fund the development of new projects.
What does project bonding entail?
According to recent surveys, infrastructure is beginning to be recognized as a distinct asset class, and allocations to this asset class are likely to rise dramatically. However, as a result of the global financial crisis, banks now have to adhere to stricter regulations regarding lending requirements, which means that infrastructure projects can no longer be funded solely through traditional debt, and other more innovative financing options must be considered and implemented.
Project bonds are a new type of debt financing that can be used to finance infrastructure projects. Banks have traditionally financed agreements, but the adoption of Basel III laws necessitates more supervision and disclosures, resulting in increasing costs and capital requirements. These increased expenses will be passed on to project developers, resulting in lower project IRRs (internal rates of return). Companies may be able to lower project funding costs by tapping into the institutional bond market.
South Africa’s R3,4 trillion infrastructure initiative cannot be funded solely by the government and banks. Bonds allow project developers to tap into the R3 trillion in assets managed by institutional investors in South Africa. Furthermore, Sovereign Wealth Funds are beginning to invest directly in infrastructure projects, which could be a future source of finance for capital projects.
Institutional investors can engage in infrastructure projects using project bonds, which are listed, tradable instruments that can provide higher risk-adjusted returns.
Investors with a lesser stomach for risk, which is intrinsically higher in the construction business, may find project bonds to be unappealing as a funding instrument. Prior to the financial crisis, capital markets were thought to be less reliable than debt markets, but this has changed as global liquidity has decreased. While local institutional bond investors are willing to take on performance risk, they are rarely willing to take on construction risk.
Although not all debt portions of these transactions will be able to take advantage of this source of finance, the project developers will undoubtedly benefit from this mechanism in the form of potentially higher returns due to the lower cost of capital.
Project bonds have been used successfully to fund infrastructure projects in Europe and America so far. Despite increased market volatility, corporate bond markets in Europe continue to grow, and it is expected that the use of corporate bonds to fund infrastructure projects in Europe will play an important role in improving the economy.
Kenya and Nigeria are two African countries that have effectively implemented project bonds. Institutional investors are increasing in both countries. Corporate bonds are tax-free in Nigeria, while infrastructure bonds are tax-free in Kenya, encouraging their usage as an alternative funding vehicle.
While the need for infrastructure development is clear, the rest of Africa is still in the early stages of developing project bonds. This will require investors to raise more funds, borrowers to gain greater confidence in the bond market, and governments to create an environment that encourages the issuance of project bonds.
The first listing and investment-grade rated infrastructure project bond, held completely by institutional investors, took place in April of 2013. In June 2013, the bond was listed on the Johannesburg Stock Exchange. The principal transaction advisors were Deloitte & Touche in collaboration with Trident Capital, with Standard Bank acting as lead arranger, book runner, and debt sponsor. CPV Power Plant No.1 Bond SPV (RF) Ltd, a Soitec Solar GmbH affiliate, issued the bond. The money was utilized to build a 44 megawatt-per-watt-hour concentrated photovoltaic plant. The project, which will be located in Touwsrivier, Western Cape, will be the world’s largest CPV plant. Soitec, a Euronext Paris-listed French firm, is a global pioneer in the production of semiconductor materials for electronics and, more recently, energy.
The Touwsrivier Solar Project, which was funded using bond proceeds, is one of 28 round 1 renewable energy projects that were awarded preferred bidder status by the Department of Energy on November 5, 2012. Developers of renewable energy projects will sign 20-year Power Purchase Agreements with Eskom, which will be supported by the Department of Energy.
The factory will be erected in Touwsrivier, a poor town in the Western Cape that is located along the N1 motorway. The community has a high number of alcoholics and has a high unemployment rate of about 65 percent. Despite the fact that Soitec would have benefited from a higher solar resource in the Northern Cape, as part of their commitment to social and economic development, they chose to build their plant in Touwsrivier, which has a high solar resource.
The design of the bond is what makes it appealing. Moody’s Investor Service has awarded the bond a long-term Baa2.za South African national scale rating.
The repayment terms of the bond are its most outstanding characteristic. It has an appealing fixed coupon rate of 11% for a period of 15 years, based on an amortizing profile rather than a bullet structure. This basically gives the bond a 7-year modified term. In contrast to a traditional bond, when investors get the capital return at maturity, this structure allows both the principle and interest to be repaid at the same time. This puts it on par with a seven-year swap instrument. The 11 percent yield is 450 basis points more than a 7-year swap.
The project is contained in a CPV Power Plant 1 special purpose vehicle. Soitec owns 60% of the SPV, empowerment partner Pele Green Energy owns 35%, and the Touwsrivier Community Trust owns 5%.
The ability to supply a bond of this sort successfully demonstrates the sophistication of the South African bond market, especially given that technology has yet to be tried on a utility-scale. The successful issuance of the bond provides an alternate debt funding source for infrastructure-related projects.
Are project bonds debt-free?
Project finance is a specialized type of financing that is only used in one situation: the non-recourse or limited recourse funding of a single asset or group of assets (a ‘project’). The following are some of the more notable distinguishing characteristics:
- Payment is totally contingent on the revenues obtained from the relevant project, without recourse to the sponsors, with a few exceptions indicated later in this chapter.
- As a result, the loan liability for the sponsors is typically ‘off balance sheet.’
- The project must be evaluated for credit without the involvement of the sponsors;
- a consistent cash flow to the project is essential this is done through an unequivocal requirement for payment, without exception or set-off, as well as the creditworthiness of the project’s offtaker or offtakers;
- Due to the financing’s reliance on project cash flow, the project is often walled off in a separate project business a special purpose vehicle (SPV) that is physically isolated from the project sponsors and tightly controlled by the lenders.
- All key project assets, as well as the sponsors’ shares in the project company, are secured by lenders.
At its most basic level, the project can be viewed of as a box, walled off according to lender rules, into which funding is given, a product is sold, proceeds from those sales are received, and loans and interest are repaid. The project sponsors’ risk is confined to their equity involvement in the project because the project financing is either non-recourse or limited recourse (for example, an obligation to fund construction cost overruns).
A project finance arrangement intrudes significantly into the operation of the project because it relies on project cash flow for loan repayment. Lenders evaluate and sign off on each material contract, and any revisions require their permission. When a commodity is involved, the necessity to ensure cash flow often necessitates hedging prices during the loan period, as well as hedging currency risk if the project’s earnings are paid in a different currency than the loan. The cash flow of the project is managed by requiring that all project earnings be placed into a series of accounts controlled by the lenders, from which money are paid according to a pre-determined ‘waterfall’ (priority) structure.
This type of financing differs significantly from general corporate financing, in which the lender’s primary concern is the sponsor entity’s credit, not a specific set of its assets, and in which, even if the financing is secured, the lender is more concerned with the overall value of the assets rather than the specific contractual arrangements for a subset of them.
While project financing and structured financing share many of the characteristics listed at the top of this page, structured financing differs from project financing in that structured financing pools and securitizes various assets of a particular class, or their cash flows, and uses derivative instruments to spread risk and increase liquidity, rather than concentrating and controlling risk in a single or small set of assets.
What is the purpose of infrastructure bonds?
Bond financing is a sort of long-term borrowing that is widely used by state and local governments to raise funds, mainly for long-term infrastructure assets. This money is obtained by selling bonds to investors. In exchange, they agree to repay the funds, plus interest, according to predetermined timelines.
How many different sorts of bonds are there?
When valence electrons are transported from one atom to the other to complete the outer electron shell, an ionic bond is formed.
To complete the outer shell of the chlorine (Cl) atom, the sodium (Na) atom gives up its valence electron. Ionic materials are brittle in general, and there are significant forces between the two ions.
When the valence electrons of one atom are shared between two or more specific atoms, a covalent connection is formed.
Many substances, such as polymers, have covalent bonding. Polymer-based materials, such as nylon rope, are one example. Long chains of covalently bound carbon and hydrogen atoms in diverse configurations are typical polymer architectures.
A metallic bond is produced when the valence electrons are not attached to a specific atom or ion, but instead exist as a “cloud” of electrons surrounding the ion centers.
When compared to materials having covalent or ionic bonding, metallic materials exhibit good electrical and thermal conductivity. Metallic bonding is seen in metals such as iron.
Most materials do not have pure metallic, pure covalent, or pure ionic bonding in the actual world; they may have other types of connection as well. Iron, for example, has a lot of metallic bonding, but it also has some covalent bonding.
This wrench, discovered in a Malaysian car store, has been subjected to a lot of abuse and is plainly exhibiting its age. The rusting indicates that the metallic bonding is not perfect at a molecular level, and the bending suggests that the original crystalline structure has been altered.
What is the purpose of surety bonds?
A: Surety bonds guarantee that contracts and other commercial transactions will be executed according to agreed-upon terms. Consumers and government bodies are protected by surety bonds from fraud and misconduct. When a principal violates the terms of a bond, the aggrieved party can file a claim against the bond to recoup losses.
Project funding might come from a single source or from a group of investors. The project’s governance will vary depending on the needs of the project’s investors and the life cycle option chosen.
In some manner, all endeavors require finance. In the majority of cases, money (capital) is required to complete the project. The basis for this money is provided by the business case. When launching a project, it’s critical to have the necessary money on hand or to have an assurance that they will be.
Grants, loans, joint ventures, and other methods such as the private financing initiative (PFI) or public-private partnerships can be used to fund projects either domestically or outside (PPP). It would be irresponsible, if not unlawful, to start a project without adequate funds.
Why do the majority of investors opt for project financing?
Without extra sponsor guarantees, project finance helps finance new investment by structuring the financing around the project’s own operating cash flow and assets. As a result, the strategy can reduce investment risk and raise funds at a cheap cost, which benefits both the sponsor and the investor.
Is it possible to lose money in a bond?
- Bonds are generally advertised as being less risky than stocks, which they are for the most part, but that doesn’t mean you can’t lose money if you purchase them.
- When interest rates rise, the issuer experiences a negative credit event, or market liquidity dries up, bond prices fall.
- Bond gains can also be eroded by inflation, taxes, and regulatory changes.
- Bond mutual funds can help diversify a portfolio, but they have their own set of risks, costs, and issues.