Bonds offer more flexibility in funding regional infrastructure projects

THE sky is the limit in terms of pay-offs to the person who can come up with a convincing bond-financed project, according to Clive Ransome and Ian Baxter of Linklaters & Paines.

'The rewards available to the architect of the ideal project-related security are virtually unlimited,' they wrote in an article published in a capital markets newsletter, Capital A$ia.

They said the trend towards using bonds in funding infrastructure projects was growing in Asia. 'Bonds have many advantages over traditional commercial bank lending. Bonds may, in a project context, be issued for a longer term than commercial debt,' the report said.

'This has the enormous advantage of reducing early-year demands on the revenue stream as the repayment of debt is staggered.

'Early-year tariffs for a power station or toll road can therefore be reduced with a consequent benefit to the consumer [and, in the case of competitive bids, for the bond-financed bidder].

'It may also allow the development of projects which would otherwise be [impossible to finance] if the only source of debt were to be shorter-term bank borrowings.' The report said documentation for bonds was traditionally less heavily negotiated than bank loans, and lead times and negotiation costs could be cut, compared with those involved in project financing.

Some disadvantages include the typically large numbers of investors in bonds, making a meeting to discuss a problem with a particular project logistically difficult. One solution suggested was to deem unexercised voting rights to have been cast with majority lenders.