the larger players in the market (cf. §5.1.8). Therefore, actual project finance lend-
ing, as opposed to loan arrangement, is spread among a reasonably wide range of
A bond issued by a Project Company is basically similar to a loan from the bor-
rower’s point of view, but it is aimed mainly at the nonbanking market and takes
the form of a tradable debt instrument (cf. §5.2). The issuer (i.e., the Project Com-
pany) agrees to repay to the bond holder the amount of the bond plus interest on
fixed future installment dates. Buyers of project finance bonds are investors who
require a good long-term fixed-rate return without taking equity risk, in particu-
lar insurance companies and pension funds. (Note that a bond in this context
has nothing to do with “bonding” or “bonds” issued as security, e.g., in an EPC
Contractcf. §7.1.10. Bonds may also be referred to as “securities,” “notes,” or
“debentures.”) The market for project finance bonds is far narrower in scope than
that for bank loans, but significant in certain countries.
The figures for the bond market in Table 3.3 show that no less than $16 billion
of the total of $25 billion of project finance bonds issued in 2001 were placed for
projects in the United States, but in addition to this bond financing is also raised
in the United States for projects outside the country, especially in Latin America.
The recent growth of the U.S. market for project finance bonds primarily reflects
a lower continuing demand for bonds in the power sectors.
A few other countries have developed domestic bond markets where investors
are prepared to invest in project finance bonds; this is the case with Canada, the
United Kingdom, and Australia, and (in 2001) Malaysia and South Korea. As can
also be seen in Table 3.3, the development of the project bond market in Asia was
badly hit by the 1997 crisis.
Nor surprisingly, given the U.S. preponderance in the bond market, the invest-
ment banks most active in placing project finance bonds are also mainly U.S.-
based, or with strong New York operations (Table 3.4). As can be seen by com-
parison with Table 3.3, these “top ten” in Table 3.4 accounted for 90% of the total
market for bond placements in 2001.
Subordinated debt is debt whose repayment ranks after repayments to senior
bank lenders or bond investors (senior debt), but before distributions of profits to
investors. It is usually provided at a fixed rate of interest higher than the cost of
senior debt.
§3.3 Mezzanine and Subordinated Debt 27

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