Principles of Project Finance

§9.1.1 I

NFLATION

-I

NDEXED

F

INANCING

In some markets (e.g., the U.K.) it is possible to issue bonds where the coupon

(interest rate) is X% + CPI (i.e., the total interest paid is linked to the rate of

inflation). This is especially appropriate where the Project Company has a long-

term Project Agreement where most of the revenue is inflation-linked. Inflation-

linked financing is beneficial in a low inflation environment, since it ensures a

lower cost of debt if a lower rate of inflation reduces the growth in revenues.

§9.2 INTEREST RATE RISKS

If the project is being financed with fixed-rate bonds or loans from lenders pro-

viding fixed-rate funding, then, in principle, ...