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
§3.2 BOND ISSUES
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
Contract—cf. §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.
§3.3 MEZZANINE AND SUBORDINATED DEBT
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
§3.3 Mezzanine and Subordinated Debt 27