Debt Finance for Infrastructure Projects

Abstract By: J. Paul Forrester and S. Raymond Tillett, Mayer Brown & Platt I. Introduction Infrastructure (e.g., transportation, power, telecommunications and environmental) requirements are growing rapidly, both domestically and internationally, and in both developed and developing countries, far outpacing the public and other traditional sources of financing available for these requirements. A considerable "funding gap" has either already arisen or is widely predicted. This has led to the exploration and development of private sector alternatives to traditional public financing sources and has created a new lexicon of "public-private partnerships" and "infrastructure privatization" for these activities. According to the World Bank, developing countries currently spend about $200 billion a year on infrastructure development. 1 Although primarily financed by governments to date, this level of government spending places an enormous burden on public finances and is probably unsustainable over the long run, especially in Asia where infrastructure investment is expected to rise from 4% to 7% of grossdomestic product by the year 2000. The Asian Development Bank has recently projected over $1 trillion of infrastructure investment in Asia by 2004. The scope of this projected new infrastructure investment is awesome. For example, China wants to install 8 million telephone lines a year after 1995. This in itself is an impressive goal, until one notes that in 1992 China only had a total of 18 million installed lines. 2 In addition, a common problem with existing infrastructure investments in developing countries is inferior performance when compared with comparable investments in developed countries. Until recently, most infrastructure has been financed by the public sector through budget allocations and, as often as not, by sovereign borrowings. Often the results of such public spending have been quite unsatisfactory with clear evidence of corruption, inefficiency and substantial waste. On the other hand, infrastructure investments can deliver major benefits in economic growth. 3 Moreover, failure to make necessary investments in infrastructure can impair or derail a country's economic growth and development. Private infrastructure investment (as opposed to public investment) is growing rapidly throughout the world, but especially in the developing countries and emerging markets in Asia, Latin America and the former Eastern bloc. According to one recent survey, private investment in infrastructure outside the United States doubled from 1993 to 1994 and the survey reported over 900 projects amounting to almost $680 billion that have been constructed or are under development in 72 countries. 4 This survey noted the importance but limited availability of commercial bank financing for these projects and that obtaining long-term institutional debt and equity financing in sufficient amounts remained a challenge even for financially sound, well-structured projects. 5 This survey also noted that the large construction companies increasingly dominate infrastructure development, but are funding this development on their own balance sheets. Another recent survey of project sponsors echoed this concern and also complained of a lack of creativity and sophistication among project advisors and lenders. 6 These and other similar surveys provide clear evidence of a need for an exchange of information and education in this area. Financing for infrastructure is available from several traditional sources: government funding (consisting of grants, loans and credit enhancement) and direct investment, suppliers (with respect to construction financing), multi- and bi-lateral agency funding, credit facilities provided by commercial banks or other financial institutions (provided in reliance upon the credit of the corporate sponsor of the particular infrastructure project (whether contractor, owner or operator) or sovereign sponsor of the infrastructure project), capital markets financing based on such credit (in the form of U.S. public

. as it is officially known. It allows a sponsor to undertake a project with greater risk than that for which the sponsor is willing to accept full recourse.offerings. repayment of the financing should be isolated from most factors (other than currency devaluation) which might otherwise adversely affect a more traditional cross-border. local market considerations and developments unrelated to any particular project that may adversely influence the financial condition or business of the sponsor. 8 Since World War II. the risks arising in this type of financing are limited primarily to those associated with the particular project. Project finance allows the project assets to be separated from the sponsor and to be financed upon the cash flow from the project assets. if structured correctly. many have noted that project finance. tolls. limitation of on-balance sheet indebtedness or recourse (they are not necessarily the same thing) is one of the principal objectives of most project sponsors. . certain developing countries). It is in the . In addition. most recently. credit-based financing. only a few of the member countries will be in possession of an investable surplus available for overseas loans on a large scale. By contrast. individual projects or select groups of projects can be financed separately.. Project finance has been employed in almost all capital intensive industries and particularly in transportation (aircraft. carry manageable (and therefore marketable) risks. Project finance has also commonly been used in countries whose capital markets are small relative to their project finance requirements (e. the International Bank for Reconstruction and Development or IBRD).and bi-lateral agencies' participation into a larger number of total supported projects.g. infrastructure can be financed through limited recourse securities which. public international organizations have assisted economic development in the emerging markets. to minimize the effect of the financial condition and profitability of the sponsor on the availability of its financial resources. especially in the years immediately following the war. particularly the World Bank (or. and the revenues anticipated from an identified source (such as tariffs. Financing which is based upon the credit of a private sector or sovereign project sponsor is limited in availability. to a special purpose vehicle. in power generation. Moreover. to leverage multi. at least in theory. and to limit the risk to the sponsor from the financial problems of a particular project. Provided the relevant industry (or segment of the economy) performs as anticipated. In fact. and the industry (or segment of the economy) served by the project. through reliance upon project finance techniques. and the contemporaneous issuance of securities that are payable from revenues generated by the project). take-or-pay contracts or power purchase agreements) under contractual arrangements negotiated as part of the financing. Australia and Canada) or are relatively immature (e. private sponsors of international infrastructure projects generally seek to avoid incurrence of indebtedness that permits creditors to have recourse to the sponsor. As Lord Keynes stated at the Bretton Woods Conference (at which it was determined to form the World Bank): . by unbundling and encapsulating the risks comprised in international infrastructure projects 7. in mineral (including oil and gas) and other natural resource exploration and development and. . project financing is structured so as to be reliant only (or principally) upon a specific project. Eurobond offerings and private placements). which relieves the sponsor of a general contractual obligation to repay the infrastructure financing.g. rail and shipping). Accordingly. municipal bond offerings. often under a government-granted concession. Under this approach. Thus. One of the principal problems to be addressed after the war was the need for investment capital to rebuild war-torn economies and for economic development in less developed countries. project financing (dependent solely or principally on the assets and cash flow of the project in question) and securitization (consisting of the transfer of the right to receive the revenue from the project. allows project participants to assume those risks that they can best control and. The typical project financing is structured to provide lenders with only limited recourse to the sponsor. and is also subject to changes in the perception of the creditworthiness of the sponsor.

exchange controls could result in international investors not being able to receive payments in specified currencies on a timely basis. Infrastructure projects represented more than 25% of the $2. or the industry segment served by the project. out of the country in which the project is located. Country-specific risk must be taken into account. privatization and the need for infrastructure development. Political Risks Loans and other investments dependent on revenue streams from foreign projects are subject to risks specific to the country involved. causing investors to examine differences in law and politics from their own nation. will directly impair the project's likelihood of repaying its lenders and other investors. How then can the other member countries play their proper part and make their appropriate contribution to the common purpose? 9 This challenge still remains today. or of investors to repatriate earnings. repatriation of earnings. including the possibilities of devaluations. Repatriation restrictions could prohibit or limit the ability of lenders to move payments received. "IFC") in 1995. Investors must also consider the likelihood. investors must also take into consideration the risks of unanticipated developments that might adversely affect the project. Furthermore. which was the fourth consecutive year of more than 10% growth in financing volume. and whether . currency arising from exchange controls or other currency restrictions. and mainly from the United States. 10 Arranging cross-border infrastructure financing requires that the project participants assume certain risks. including: Currency Risk Currency risk with respect to an international infrastructure financing has three components: the risk arising from incurring liabilities to fund a project denominated in a currency (typically U. the adequacy of project cash flow could be impaired. Additionally. taxation.9 billion in financing approved by the International Finance Corporation (the private sector member of the World Bank group. These risks include the risk that underlying contracts will be changed or impaired. or investors could have to settle for payment in another currency. (ii) the attitude (historical and current) of the government towards foreign investment. or if new approvals or extra fees are required to effect conversion to the currency of payment. or inability to repatriate. Any significant devaluation of a local currency. exchange requirements and repatriation restrictions. of any change in political regime. Any devaluation of the local currency in which project revenue is denominated will require a corresponding increase in the project's cash flow to assure that economic returns are maintained. and (iii) the degree of involvement of the government in the economy and industry segment served by the project.5 billion. dollars) different from the currency of project revenues and the risk of inconvertibility of. and probable effect.nature of the case that the bulk of the lending can only come from a small group of member countries. in particular regarding currency exchange.S. and risks of war and civil disturbance. and to service the project's debt (especially if denominated in another currency). the risk of expropriation or confiscation of project assets (both outright and creeping). including (i) the political stability of the applicable governmental units (central and local). If only a limited supply of a specified currency is available. without offsetting factors. The total value of all projects supported by the IFC in 1995 was $19. a record for the IFC. Investors in financings for foreign borrowers must consider and evaluate the risks associated with foreign currencies. in addition to those common to infrastructure projects.

Aside from these cross-border risks. and to the specific industry segment of the economy served by the project. In addition. Consequently. an industry segment or a project. mortgage. infrastructure involves basic products and services needed or required by the public. projected trends and economic expectations are therefore very important considerations to all investors and other project participants. unlike the related cash flows. tax policies may have an important effect upon a project and therefore warrant special consideration. will often have an important effect upon the availability and amount of project revenues for debt service. Historical use. withholding and other revenue and financing-related taxes need to be considered carefully by investors in evaluating and structuring infrastructure financings. to the extent physically and legally removable. Investors must recognize that project financing of infrastructure is subject to additional restrictions in the exercise of traditional remedies. In addition. towards international financing in general or towards the sponsors in particular will change. may have only salvage value to lenders. Similarly. Construction and Technology Risk Since there is often incomplete data or in some cases no reliable data concerning project revenues prior to completion. Current and expected income. or a toll road with only a single destination) is directly subject to the economy of the country in general. and the existence of international tax treaties applicable to foreign investors. are generally non-transferable).policies and attitudes toward the particular project. However. toll roads and bridges cannot be moved). the power plant. infrastructure financing involves the following project risks: Economic Sensitivity Insulation from the general credit risk of the private or sovereign sponsor is one of the benefits of infrastructure project financing. modification or termination of favorable tax treatment of the project entity. For example. assets or property. local withholding laws. where the financing is structured as a securitization of concession rights (which. Significant increases in such taxes or cancellation. such financing is also insulated from (and deprived of the benefit of) any diversity in activities of the sponsor which may cushion an economic downturn affecting the project. thereby further diminishing cash available for debt service. thereby diminishing the revenues available for the repayment of the project's debt. operational. stamp. foreclosure on a power plant with a sole power purchaser (such as a state-owned power company) is of little use if the problem is an inability of the power purchaser to make the required payments. If there are no other significant purchasers of power available in the relevant market. The termination of a favorable tax treaty or the implementation of new withholding and other taxes will generally require the issuer to make "gross-up" payments to lenders and other investors. Limited Remedies Project finance involves limited recourse to sponsors and other non-project assets. lending for construction of a project is properly regarded as a relatively high-risk .11 Effect of Tax Policies Beyond the impact all government policies and attitudes may have on an economy. a financing which is wholly dependent on the demand for a particular product or service from a particular facility (such as a single power plant with a single power purchaser. the project or the sponsors could have an adverse effect upon the availability of cash flow from an infrastructure project. upon the occurrence of an event of default there may be no asset on which to foreclose (as a practical matter.

Construction companies will also finance retainage. and a careful analysis thereof by an independent expert. and thus better financing terms. Current Universe of Debt Instruments: Roles and Limitations At the risk of oversimplification. in the case of financing a concessioned project. particularly in the context of project finance. Cogentrix. The ability to perfect a security interest and. and realize the benefit from. 5. more importantly. 3. A project with an operating history is easier to finance than a project subject to unquantified operating risk. permits and concessions transferable to someone who can finish the project and operate it? · Are hard assets transferable or removable? · Is there a fully effective and legally enforceable assignment of all rights to future cash flow? · Are the underlying operational contracts transferable for performance by someone else? II. technology risk or performance risk. to be able to transfer the asset at the time of foreclosure to reduce or repay in full the outstanding indebtedness are highly important considerations to lenders. particularly in the capital markets. AES.. 1. secured creditors always want to know the likelihood and cost of being able to foreclose upon. Commercial Banks Private Placements Rule 144A/Public Offerings ECA/RDB/IBRD Financing Municipal Finance Most private infrastructure developments (not yet projects) will be financed on a sponsor's balance sheet (although the amount to be so financed will usually be relatively small). warranty liability and any residual interest in the project on their balance sheets. Kenetech and Mission Energy) have obtained financing through public offerings. is therefore directly tied to its stage of development and the availability of operational data. completion risk. These offerings are a hybrid of corporate/project finance and the indentures governing such offerings provide significant restrictions on the issuer's ability to incur indebtedness at the project level because of the "seniority" of such indebtedness over the issuer's indebtedness. A project that is complete and operating is considerably easier to finance than a project subject to construction risk. the underlying contracts and the project assets themselves. 4. Historical and pro forma operating data. However. Sponsors of private infrastructure projects will normally seek to obtain financing at the project company level because of the ability to obtain better ratings.g. 2. the right to receive revenues under the concession). are essential. the current universe of debt instruments issued to finance infrastructure comprises or is provided by the following: 1. Transferability Project financing is usually secured by the cash flows (including.proposition. Commercial Banks . The ability to finance any project. a number of independent power companies (e. the assets which secure repayment of their financing. In evaluating any limited recourse financing. project lenders focus on the following issues: · Are the licenses. In considering the transferability of project assets.

Commercial banks have always had an active role in project finance transactions. if such hedging is under swaps and collars. principally due to the short-term nature of a commercial bank's liabilities (i. the execution and delivery of definitive financing documents) or afterwards. It has provided and will continue to provide substantial capital to qualifying projects throughout the world. the permanent. cap or collar (although. the project sponsor's preferences in this regard or the original underwriting banks' desire to reduce their level of commitments or all or any combination thereof. The successful commercial bank syndicate for a project financing will usually seek to "sell down" its underwritten commitments in a further coordinated syndication to a larger bank group. The project's sponsor will normally request commitments from its commercial banks for both construction financing and. the commitment for construction financing will be for 2 to 3 years and. Most permanent financing commitments by commercial banks will include specified increases in the applicable interest rate ("step-ups" in the applicable margin or spread over the commercial bank's cost of funds) in an effort to create escalating incentives for the commercial bank financing to be refinanced before its scheduled maturity. insurance companies (the private placement market's most active buyers) face recently imposed risk- . most sponsors will seek to refinance the project with permanent.. following completion and demonstration of operational performance. its deposits). Return to List 2.e.. depending upon the confidence of the original underwriting banks in the "marketability" of their transaction in the bank project finance markets (and their willingness to assume the risk of adverse change in such markets). Private Placements Private placements have also played a prominent role in infrastructure finance. project finance is generally thought to have begun in the 1930s when a Dallas bank made a non-recourse loan to develop an oil and gas property and to have "come of age" in the 1970s and 80s with the successful project financing of the North Sea oil and gas. for permanent financing will be from 10 to 15 years. long-term financing of its project. Typically. Australia's Northwest Shelf gas. lacks registration requirements and offers less maturity sensitivity than commercial bank financing (because of the longer-term nature of an insurance company's assets and the reduced asset/liability mismatch). However. upon completion of construction and demonstration of the project's acceptable performance. the timing constraints of the project. project collateral will have to be shared with such providers). independent non-utility power generation in the United States. 12 In fact. Even though the commercial banks provide a permanent. following completion. which will normally bear interest at a floating rate. long-term financing commitment. Project finance is a key element of recent and dramatic growth in the private placement market. This subsequent syndication may occur before financial closing (i. commercial banks usually limit in amount and otherwise closely monitor and control their project finance exposure. The project's construction financing.e. This traditional model has proven very successful over a considerable period of time and in a wide variety of industries and specific applications. although in rare cases commercial banks have provided permanent financing commitments of 20 years or more. However. and similar substantial projects. because payments thereunder may be due from the project and thus the swap or collar providers may become creditors of the project. long-term and fixed rate financing. will usually require interest rate risk to be hedged through an interest rate swap. This refinancing will usually be on terms that allow the project more operational flexibility because construction risk has been eliminated from the project and because obtaining waivers from institutional holders is more difficult. This market has demonstrated strong tolerance of "story credit" and transaction complexity. Commercial banks have successfully provided project financing because of their demonstrated ability to evaluate complex project financing transactions and to assess and assume the construction and performance risks usually involved in such financings.

below which there are significantly fewer available investors. (3) the seller and the prospective purchaser must have the right to obtain certain information about the issuer if such information is not . capital markets by foreign issuers. private placement market to become more attractive to foreign issuers. which usually seek high-quality. By facilitating resales of securities issued in private placements. especially for foreign issuers. Return to List 3. From an issuer's standpoint. capital markets has become available. capital markets for infrastructure financing has been enhanced considerably by the adoption. (2) the securities must not. automated interdealer quotation system (such as the NASDAQ System). when issued. including those offering debt securities to finance infrastructure projects. in a traditional private placement (in reliance upon an exemption from the registration requirements 15).S. In a Rule 144A placement. its securities to one or more investment banking firms which will then resell. and to increase access to the U. subject to certain limitations. issuers rely upon the bank's perception of the marketability of the issuer's securities. especially in that securities are offered by the investment banking firm to potential investors on a "take it or leave it" basis. ("D&P") have announced private placement rating systems which are more lenient than their respective public ratings (insofar as the private placement ratings express views about ultimate payment and unlike public ratings do not place the same stress on timeliness of payment). Rule 144A established a non-exclusive exemption from the registration requirements of the Securities Act for resales by investors to eligible institutions of privately placed securities. the market "break" seems to be at NAIC 2 (the equivalent of S&P's "BBB" rating).based capital requirements and there is a demonstrable "flight to quality" in this market which has made it much more difficult to obtain financing (or at least more expensive to obtain financing) for a marginal project.S. be of the same class as securities listed on a U. The expressed intention of the SEC in adopting Rule 144A was to increase the liquidity of privately placed securities by allowing unrestricted resales of such securities among QIBs. the securities to a larger number of QIBs. by the Securities and Exchange Commission (the "SEC") of Rule 144A ("Rule 144A") under the Securities Act of 1933. an issuer will sell.S. Notably.S.S. Rule 144A provides a non-exclusive safe harbor from the registration requirements of the Securities Act for resales of certain se4curities to "qualified institutional buyers" ("QIBs") 14. long-term investments. The U. in reliance upon Rule 144A. causing the U. Prior to the adoption of Rule 144A. capital markets is comprised of public and corporate pension assets. While an explanation of the National Association of Insurance Commissioners' ("NAIC") rating system is beyond the scope of this paper. privately placed securities were subject to significant restrictions upon resale under applicable U. With the adoption of Rule 144A. Instead of direct negotiation with investors.S. capital markets are therefore naturally attractive to infrastructure projects which seek long-term financing.S. in 1990. Rule 144A/Public Offerings Approximately $4 trillion of the U. rendering such securities more illiquid. a broader market for private financing in the U. A sale in compliance with Rule 144A must meet four basic criteria not discussed in detail in this paper: (1) the securities must be offered and sold only to QIBs. securities rules. as amended (the "Securities Act"). characterized by greater liquidity than existed prior to adoption of the Rule and ease-of-entry.S. securities exchange or quoted in a U.S. As discussed below. both Standard & Poor's Rating Agency Group ("S&P") and Duff & Phelps Credit Rating Co. 13 The attraction of the U. the way in which Rule 144A placements are conducted is very similar to traditional underwritten public offerings. Rule 144A has created liquidity in the secondary market for privately placed securities.

19 This growth is evident in the "reengineered" Export-Import Bank of the United States ("US ExIm"). which has formed a Project Finance unit and has been very proactive in educating potential users about its services and in streamlining its application requirements and approval procedures. includes those issued by private or public sector issuers in the emerging markets) have made it possible to structure a capital markets financing for infrastructure projects targeted to the U.S. Infrastructure financing using Rule 144A or public offerings seemed to offer the best of both worlds -access to the deepest segment of the U. as well as significant growth in infrastructure finance activity at the World Bank and International Finance Corporation ("IFC"). More controversially. capital market financing for an infrastructure project is a "major development of the 1990s. Mexico. capital markets (because of its liquidity and required minimum credit quality) and availability of long-term. this market generally requires an investment grade rating. the long-lived assets which characterize infrastructure investments ideally should be financed with comparable debt maturities. 20 IFC has created and expanded its infrastructure department. the IFC has sought and obtained several significant financial advisory engagements and syndicated many of its B loans. For this reason.S. in the case of the Hub River project in Pakistan. The creation of this market and the growing appetite among U. and (4) the seller must ensure that the prospective purchaser knows that the seller may rely on Rule 144A. private placement market in reliance upon the resale exemption afforded by Rule 144A and. it was 6 years). in response to the adoption of Rule 144A. the IFC Latin America and Asia Loan Trust 1995-A (some 2 years in gestation) sold interests in a pool of 73 LIBOR-indexed. The latter is especially important to infrastructure projects because shortening the maturity of financing can dramatically increase debt service requirements which will drive infrastructure tariffs to higher levels.S. 23 One can only hope that this transaction will provide the same stimulus to the capital markets and create the same secondary liquidity for similar instruments as did the groundbreaking RTC transactions for mortgage-backed securities. Chile. Venezuela. this will depend significantly on the transaction's structure and. The World Bank has attracted a lot of recent criticism and calls for reform. as expected. See "Investment grade" discussion below. Return to List 4. Colombia. China. the Philippines and Thailand. which has likewise established a special Project Finance unit. The use of a U. by definition. increased its maximum project loan amounts and has both sponsored and made significant investments in several country-specific funds. India. a large number of foreign and domestic companies have issued securities in the U. conceded by the World Bank to be over 2 years 25 (although. 24 Most of this criticism concerns the delay in obtaining World Bank financing. private placement market 17. 21 In a laudable transaction this year.S. But." 18 While S&P believes that some European and Asian issuers will obtain an investment grade rating. in particular. Since 1990. Brazil. 22 This transaction introduces the potential benefits of secondary liquidity and diversification to investors. sponsored and invested in several infrastructure funds and increased its cofinancing (the so-called "B loan") program.publicly available 16. there has developed a liquid secondary market for these securities among QIBs. A similar proactivity has been exhibited by the Overseas Private Investment Corporation ("OPIC"). 26 .S. ECA/RDB/IBRD Financing One of the most interesting recent developments in infrastructure finance is the growth in export credit agency ("ECA") and regional development bank ("RDB") activity. institutional investors for high-yield securities (which. and inflexible rules that limit its guarantees to less than 5% of its lending volume and prevent guarantees from being extended to low-income countries that qualify for its concessioned loans. dollar-denominated loans to non-governmental borrowers in Argentina. on how currency and political risks are handled. fixed rate debt capital.

The Tax Reform Act of 1986. Municipal Finance The municipal bond market is the capital formation market used by American states. although several ECAs have implemented reforms aimed at expediting approvals increasing the use of guarantees and other credit enhancements to increase the total value of supported projects. municipal finance has clearly demonstrated its value in providing municipalities with flexible funding for infrastructure investments. The tax-exempt nature of municipal bonds permits American local governments to secure financing at lower borrowing costs than can be obtained by corporations of comparable credit quality.S. A reduction in the maximum marginal United States federal income tax rate. The SEC has. However. accordingly. which made sweeping changes in the Internal Revenue Code. In addition. which projects will be financed. municipal bond market is characterized by a wide variety of public bodies that issue debt in that market. is the most recent and perhaps the most dramatic example of this. the same municipality could also issue bonds supported solely by revenues of the municipality's water or electric utility system. at this time. Today. Nevertheless. provides only general rules and guidelines which result in substantial differences between ECAs. While the participation of multi. makes tax-exempt income less valuable to investors in municipal bonds and. Large states and cities. Legislation enacted by the United States Congress can expand or contract the ability of state and local governments to issue tax-exempt bonds. to which US ExIm and most other ECAs subscribe. are payable only from payments made by the private corporation. while somewhat tax sensitive and relatively unique to the U.Similar criticism has been made about the ECAs and RDBs." including a levy of taxes for the specific purpose of repaying the bonds or notes. can drive up the interest rates at which state and local governments may borrow money. such as the states of Michigan and Ohio or the cities of New York and Chicago. accordingly. The U. for example. is largely unregulated. or industrial revenue bonds ("IRBs"). bonds payable strictly from assessments charged to those property owners specifically benefited by the improvements being financed. counties and other units of local government to finance necessary governmental infrastructure improvements. bonds supported only by the municipality's promise or "moral obligation" to repay. 27 US ExIm has admitted that it subsidizes its insurance premiums (although it claims to do so only to the same extent as other ECAs). The traditional "general obligation" bond or note is supported by the municipality's pledge of its "full faith and credit. Because the municipal bond market is based upon the exemption of interest payable on its bonds and notes from federal income taxation. if so. it is extremely sensitive to changes in United States federal tax policy. made efforts to improve the quality of disclosure . it inherently distorts free competition to provide capital to infrastructure projects and may significantly influence whether and. the municipal bond market once again finds itself roiled by the prospects of a federal "flat" income tax. including the enactment of numerous restrictions on the right of municipalities to issue tax-exempt debt securities. 28 The OECD arrangement or consensus. Municipal finance has proven its value over time with its innovative instruments and solutions to inevitable political changes. The municipal bond market owes its separate existence not so much to the fact that it raises capital for units of government. cities.S. but rural villages with only a few hundred inhabitants also raise money through the municipal bond market.and bi-lateral institutions in infrastructure finance is necessary at least in the near term. but not always) from taxes levied by state and local governments. the proceeds of which are loaned to a private corporation and. a series of bonds issued by a municipality can have very different security provisions from other series of bonds issued by the same municipality. are frequent issuers of municipal bonds.. from time to time. but rather because interest on municipal bonds and notes is generally exempt from taxation by the United States federal government and (usually. The complexity of the municipal bond market is increased by the fact that the market. Return to List 5.

its development was inevitable since only United States-based taxpayers have any appetite for investments that generate United States federal tax-exempt income. but the system by which municipal bond ratings are issued and maintained cannot be compared to the process by which a continual stream of financial information is publicly disclosed to the U. Nevertheless. but the quality of disclosure can vary widely depending upon the size of the financing and the sophistication of the participants. again in sharp contrast to the corporate market.S. Ratings are. Although state income and sales taxes are usually not subject to a referendum process. bond is a city. the financial performance and flexibility of the issuing state or local government. to compel municipal issuers to make some continuing disclosure about themselves. the municipality is supposed to regularly update the information originally submitted to the rating agency. If the issuer of the G. which typically have no right to levy ad valorem property taxes. regional and local commercial banks as well. in a sense. the City of New York issued the first bonds secured by a property tax. The rating agencies play an important role in setting standards and bringing order to this unregulated market. the state or local government's pledge obligates all of its financial resources and taxing powers. on occasion." bonds have been the workhorse of American municipal finance. municipal issuers are generally not required to register their securities with the SEC or to observe the financial and other information reporting requirements required by the United States federal securities laws. State governments. the state or local government pledges its full faith and credit to repay the bond. the decision of a state governor to seek. Since that time.O.O. bond financing. Last. the other outstanding indebtedness and debt burdens of the issuing state or local government and the quality of the state or local government's . As a result. would pledge a significant unrestricted revenue stream such as income or sales taxes to support their G. general obligation bonds are well regarded by investors. but not least. income or sales tax increases is anything but a "pure" financial decision and is bound to be influenced by the political process. raised and lowered and. the municipal bond market is well supported by an extensive and sophisticated financial infrastructure. In sharp contrast to private companies that publicly sell their securities in the United States. Because property. debt is analyzed by examining the local economy. bonds. Once a rating is issued. Municipal bonds are underwritten and placed not only by Wall Street. but by regional investment banking firms and money-center. and of a state legislature to enact. general obligation or "G. operations and future prospects. county or other local government. The capacity of a particular state or local government to repay its G.O. In a G. Securing a rating is an important part in the marketing of most municipal bond issues. Prospectuses (usually called "official statements" by market participants) are commonly prepared and used in the original distribution of municipal bonds and notes. but.O. Return to List General Obligation Bonds In 1812.in offerings of municipal securities and. withdrawn.O. This financial infrastructure did not spring up overnight. most state laws require that once property taxes reach a certain level the local government must seek the approval for an issue of G. this pledge usually includes the contractually enforceable promise to levy an unlimited ad valorem property tax. corporate equity and debt credit markets. Community residents (who are also citizens and voters!) are naturally concerned about the ability of their local city council or other local legislative body to continually increase property taxes. In order to issue a rating for a municipality's bonds. the rating agencies require the municipality to submit certain information about its financial condition. income and sales taxes are relatively constant and predictable revenue sources. Except for tax revenue streams specifically dedicated by state statute or other bond financing ordinances to the repayment of other obligations. there are clear differences in credit quality within the universe of G. more recently. there is no uniform standard of accounting principles or rules applicable to the financial statements of municipal issuers.O. In addition. bonds by a referendum vote of the local citizens.O. in fact. bonds.

from a political standpoint.administration. bonds are the mainstay of U. water and sewage systems. It is important to note that S&P believes revenue bonds are inherently superior to project finance for comparable infrastructure projects. It is often easier. In evaluating the revenue bond.g. debt by an angry electorate (e. The attractiveness of financing capital projects through user fees rather than broad-based taxes. However. Revenue bonds have their origin in the development. revenue bonds typically are not subject to voter authorization and. The revenues generated by the facility are dedicated to the repayment of the revenue bonds with the bondholders standing behind only the costs of operating and maintaining the facility in the "waterfall" of revenues. bond financings relative to other municipal finance structures has shifted.O. These credit considerations shape the structure of revenue bond financings. Other legal safeguards typically include required debt service coverage ratios.g. Third. Revenue Bonds Revenue bonds are typically secured by and repayable from a user fee or particular dedicated tax rather than the full faith and credit and taxing power of the public body.O.. it is useful to contrast it with the general obligation bond. In a revenue bond financing. This financing technique has gained in popularity in an era where taxpayers (and especially local property taxpayers) are dissatisfied with the "tax and spend" practices of government at all levels. G. more importantly. investors focus on the dedicated source of repayment and structure the financing accordingly to guard against the risk of impairment of the revenue source. the creation and funding of debt service reserve funds and facility repair and maintenance funds. The first and most obvious difference is the limited source of repayment of revenue bonds.O. An issue of bonds to finance improvements to highways or roadways secured by a dedicated fuel tax (a much narrower tax than a state income or sales tax) is a second example. municipal finance. the covenant of the issuing local government to charge rates sufficient to maintain the target debt service coverage and the right of bondholders to require the issuer to retain experts and consultants to assist and advise in the management of the facility if target debt service coverage ratios are not achieved. for a local government to authorize an increase in user fees than present the general community with a new or higher tax. Over time. legal limitations on the issuance of G. As noted above. their use has expanded to finance a wide variety of municipal facilities (e. "Proposition 13" in California). Toll roads and airports are examples of facilities that both compete with other public and private entities and are well-suited to a revenue bond financing structure. bonds indeed exist. 29 . at the end of the 19th century and during the early part of this century. Bonds issued by a city to finance improvements to its municipally-owned and operated water system where the source of repayment and security is limited solely to a pledge of the fees and charges paid by residents for the use of the water is a common example of a revenue bond.. Of these four factors.S. the evaluation of the local economic base is by far the most critical. bonds is that competition between providers of the same service is more likely to be an investment consideration in a revenue bond financing.O. Situations in which the revenue bonds of a municipally run utility are actually rated higher than that municipality's G. the practical capacity of even large units of local government to incur and service ever larger debt burdens and continuing market innovations are the reasons most frequently cited for this shift. the decision to increase rates or charges is typically not subject to the regulatory process before public utility commissions and the like required in the United States of investor-owned utilities. A second characteristic that sets revenue bonds apart from G. of municipally owned and operated electric. primarily because of the ability to adjust tariffs to accommodate change of circumstances. airports. The reasons for this shift are significant because they highlight the increasingly politicized nature of municipal finance. but are few and far between. toll roads and convention facilities) where the facility has the natural capacity to generate fees and revenues. over the last two decades the dominance of G.O.

Small public bodies that lack name recognition in the municipal credit market and public bodies of all sizes with poor or limited credit quality and resources suffer when they bring their bonds to market.O. local governments are increasingly utilizing this structure as a means to lower interest costs and increase market acceptance of their bonds. Particularly in the latter situation. Among the most significant of these alternative municipal finance structures are lease 30 appropriation backed obligations. these new ideas are indicative of the flexible and creative nature of the municipal bond market. These state aid payments are "intercepted" and pledged to secure payment of the debt of the local government. The marketplace carefully studies the state laws by which the "state aid intercept" operates. If the amount of the debt service reserve fund falls below the required level. However.g. moral obligation bonds. In addition.g. with the exception of the "state aid intercept" structure and the state revolving fund." bondholders are asked to rely on a "best efforts" promise of a public body (generally a state) to seek appropriations as needed to pay the related debt. the local government creates a defined tax increment financing district and pledges any increase in ad valorem property taxes within the district from the "base year" to the repayment of the TIF bonds.S. waterlines and other infrastructure improvements) that will presumably make the TIF district attractive to businesses. it is common for the local government to team up with a real estate developer who will be responsible for building and renovating the buildings and securing the businesses that will populate the revitalized TIF district. improved roads. . sidewalks. retailers and developers. The TIF bonds are used to finance infrastructure improvements (e.S. Moral obligation bonds have been most frequently used to support state housing finance agencies and their bond financing programs to fund pools of mortgage loans for first-time home buyers and multi-family residential rental apartment projects for low and moderate income tenants. municipal bond market vary greatly... tax increment financing bonds and state revolving funds. each financing technique involves a significantly higher risk of default to investors than G. a notification process resulting in the request (usually by the state's governor) for an appropriation from the legislative body to fully restore the debt service reserve fund is required. an out of state company that is relocating a major office center or plant) or in connection with the efforts to redevelop a blighted downtown or business or industrial area. In order to obtain a rating on moral obligation bonds. sewers. This financing technique is based upon the fact that most local governments receive a significant amount of aid payments from their state government.Alternate Municipal Finance Structures Although general obligation and revenue bonds are the predominant U. and revenue bonds. As a result. the size and financial capacities of public bodies that issue bonds in the U. the issuer must covenant to maintain a debt service reserve fund dedicated to the payment of the bonds equal to the bonds' maximum annual debt service requirement. 31 Under a bond financing supported by a "moral obligation. they by no means exhaust the list of the financing structures now at work in the municipal capital market. Moral obligation bonds are generally rated one full rating category below the issuer's general obligation bond rating. but rather that of their state. As noted earlier. these alternative financing techniques are best suited to specialized situations. above and beyond being interesting financing techniques. financings using a so-called "state aid intercept" structure. municipal obligations. However. Tax increment financing (commonly called "TIF") is an increasingly popular form of financing which works hand in hand with efforts of local governments to develop unimproved land or redevelop a blighted or deteriorating downtown or business district. Investors in TIF bonds essentially assume the risks and rewards of the upside increase in real property taxes collected on the formerly vacant or blighted land generated by the new real estate development. TIF financing projects are generally undertaken either in conjunction with the development of the TIF site as a major economic development project (e. "State aid intercept" financing techniques have been developed as a way to permit these local governments to issue debt based upon not their own credit. Each of these financing techniques has in common the fact that it was developed to respond to a particular problem or situation that could not be addressed by traditional municipal finance techniques. In a TIF financing.

of course. Without the cooperation of all parties. Through agreements set forth in the statute creating the authority or district. more accurately. it is a long-term debt rating of BBB. The special purpose authority or special district is an infrastructure financing vehicle that both acknowledges the regional nature (that transcends political boundaries) of large infrastructure projects and provides a realistic solution to the bickering and suspicion that too often undermines efforts of independent political bodies to work together. like beauty. lie in the eye of the beholder. sent increasingly strong signals that it will no longer undertake to provide funding for a wide variety of state and local problems. Quite naturally.or better (S&P and D&P) or Baa3 or better (Moody's Investors Service). in recent years. Comparably rated sovereign debt currently trades (at least since the recent Mexico peso devaluation) at a substantial yield premium to corporate debt. the availability of an investment grade rating can provide significant benefits in an infrastructure financing. what it means in the context of a particular transaction.e. What is "investment grade"? Technically. This divergence increases as credit quality is lower. the rating agencies see particular transactions quite differently. . i. Moreover. a much larger pool of money. particularly where the participants are political bodies. for the nationally recognized statistical rating organizations only provide us with tantalizing glimpses of what it means or. there seems to be a notable difference between these rating agencies in rating foreign sovereign credits for domestic currency payment ability. The need of state and local governments for infusions of capital to pay for badly needed infrastructure maintenance and improvements has not been spared this trend. have a regional character and require inter-governmental cooperation and pooling of resources. such as convention centers or large water treatment and distribution systems.. Finally. See S&P's CreditReview "Global Project Finance" March 1995. but why should one government take a back seat to another? The creation of special purpose authorities or districts has been an effective solution to this problem. even for comparable maturities. issues of trust and control arise. A recent study 32 noted a surprising divergence between rating agencies when rating foreign sovereign credit as compared with comparable corporate debt. What constitutes "investment grade" may. The repayments received from the local governments will eventually replenish and even increase the revolving fund.Because those risks are often quite substantial. Importance of Investment Grade Rating As noted. the project will not be financed. The United States federal government has. This announcement has frequently been accompanied by a large lump-sum payment to the states. mention should be made of structures that permit several governmental bodies to cooperate to finance certain infrastructure improvements. but the municipality's full faith and credit as well. What is required to obtain an investment grade rating? This question is more difficult to answer. The state then loans revolving fund moneys at attractive rates to local governments to finance various infrastructure improvements. the same rating does not mean that issuers will pay the same coupon rate. Bonds are issued that are secured by the lump-sum payment. many large infrastructure improvements. funding and operations of the authority or district. Starting with the "New Federalism" of the Reagan Presidency. 33 In any event. the federal government has announced the end of various types of federal grants and aid for local infrastructure improvements. the participating governments are given some amount of control of the governance. Increasingly. local governments frequently issue so called "doublebarrelled" bonds. a number of states have created state revolving funds that seek to leverage the federal contribution. a revolving fund. Too frequently for comfort. As an alternative to simply spending the lump-sum federal payment on a specific clean water or highway project. especially "Infrastructure Finance Adopted for Global Markets" contained therein. is created from the bond proceeds. bonds backed not only by the TIF pledge of future increased property taxes. In so doing.

Generally. to interest rate and other "controllable" commercial risks) given the long-term tenor of their financing. A typical example of a "single user" infrastructure project is the independent power project ("IPP") model. Moreover. the risk appetite of such investors is quite small (limited. Alternative Financing Structures: Costs and Benefits Because the useful lives of most infrastructure assets are quite long (40 or 50 years is not uncommon). lump sum basis for the long-term supply of fuel for such plant and for the . 34 Notable investment grade-rated transactions (and the authors' view of their respective noteworthy elements) are as follows: Issuer Midland Cogeneration Venture Centragas-Transportadora de Gas de la Region Coso Funding Corp. In the 1920s an explosion in sovereign lending ended in a flurry of defaults. Moody's had rated a majority of these sovereign issuers as investment grade. the most appropriate long-term capital is provided by insurance companies. guaranteed. where a special purpose project entity (usually a limited partnership. Deer Park Refining Energy Investors Fund Funding Sithe/Independence Funding MC-Cuernavaca Trust AES California Energy Cogentrix Kenetech Mission Energy Noteworthy Element First public offering of project debt Project pipeline financing Pooling of 3 projects Refinery project financing Project debt and equity portfolio financing Investment grade rating for project under construction Toll road project Independent power company Geothermal power company Independent power company Wind power company Unregulated utility affiliate III. these investors will usually require that their investments have received an investment grade rating from at least one rating agency. limited liability company or similar pass-through entity for tax efficiency) contracts for the construction of a power generation plant on a fixed. if any at all. pension funds and similar institutional investors.Caution in the value placed on ratings is historically justified at least. At the time of default.

g. By contrast with the single user type. From a sponsor's perspective.sale of capacity and electrical energy to be produced by such plant to a utility on a long-term basis (with capacity payments thereunder in an amount sufficient to repay the project financing and equity return to the project sponsors and energy payments in an amount sufficient to cover operation. infrastructure projects are often the subject of great public interest and occasionally strong opposition. tax-efficient financing. From an investor's perspective. has been used for oil and gas. Again for tax reasons. this will require 100% financing for the project. Political risk aside. the project entity is able to raise the required project financing. Accordingly. extensive licensing requirements and sophisticated. Examples of multiple user projects include toll roads. and pulp and paper industrial projects. this represents a balancing of risk/reward. power. and the like. occasionally utilizing new technology or novel applications of old technology. with slight variations. This is particularly true for large power plants and waste treatment facilities. 35 . However. including fuel. The benefits to the project sponsor are floating rate financing. bridges and tunnels. residual risk must be adequately rewarded and it must be allowed to undertake its transaction (with reasonable flexibility to make changes thereto) without undue interference from other investors. petrochemical. commercial banks have a competitive advantage in the provision of construction financing for infrastructure projects. the "multiple user" infrastructure project looks not to a single project output purchaser.. By pledging such power purchase agreement. composting and incineration) and similar infrastructure facilities. With minor variations to the multiple user model (usually involving some degree of governmental support). although some of them are on a "crash-learning" course. it may be knowingly underpriced). especially the United States Rule 144A market. the ability to capitalize interest. and maintenance expenses). This model. an "independent" engineer) and sponsor recourse for cost overruns. mining. Notwithstanding their socially desirable or necessary purposes. it can be applied to landfills and waste treatment (transfer. To both. The foregoing clearly demonstrates the desirability of interim financing for an infrastructure project until the project has been completed and its operating performance sufficiently demonstrated in order that the project may be able to receive an investment grade rating and to obtain long-term capital. unanticipated environmental liability. and especially for hazardous or medical waste treatment facilities. risk inherent in its investment must be reasonably circumscribed and adequately rewarded. Generally. might provide an alternative source of project financing to commercial banks. the project sponsors will usually seek to defer any required equity contribution until the project is complete and producing income in order to minimize nonincome-producing assets. Financing for both single user and multiple user infrastructure projects will be secured by the facility itself and all revenues (including future revenues) therefrom. ECAs and RDBs prefer to avoid construction and technology risk. Distinguishing features of infrastructure financing include the size and complexity of these projects and the socially necessary or desirable public services that they provide. The cost to the project sponsor of commercial bank construction financing is intensive involvement by the banks or their designated representative (e. protracted delays in obtaining necessary governmental or regulatory approvals are common features. the ability to flexibly schedule drawdowns with expenditure requirements and the "comfort" that experienced commercial banks will "do the right thing" if an unexpected problem arises. The political risk can be encapsulated and shifted to an ECA or RDB for a nominal premium (as noted above. recycling. Many commentators (including one of the authors) have suggested that the international capital markets. but to many users of the facility. Infrastructure projects tend to be very large and complex transactions with long developmental periods.

and a public offering always. at least in theory. such as income bonds and other contingent interest securities. A Rule 144A offering usually. preferably an investment grade rating. more accurately.S. long-term financing and are "story" and transactioncomplexity tolerant.g. have again highlighted the volatility and. documentation for a public offering is designed to obviate any required consent or waiver except in a material situation. to structure securities designed to maximize their investor appeal and the benefits of portfolio diversification and secondary liquidity. IV. 36 In addition. These "public" markets are not as "story" tolerant as the private placement market and generally (although the Sithe/Independence transaction is an exception) do not assume construction or technology risk. can be very flexible (e.. it is less so than the Rule 144A/public markets. including the Mexican peso devaluation.Recent events. private placements offer fixed rate. social and economic goals (all of which are usually present in an infrastructure project). changes thereto) but are otherwise (in the author's view) comparable to commercial banks. and. of course. private placement investors are less flexible regarding construction drawdown scheduling (or. Use and adapt securitization techniques. the longest tenors and fixed rate financing for infrastructure projects. accordingly. municipal finance models. 5. . it is difficult to write definitive documentation (particularly the construction draw provisions) that provides appropriate investor protection during the construction period and provides the project with necessary flexibility to deal with unexpected events. Rule 144A/public offerings offer the most liquidity. as a technical matter. It is more difficult to obtain a consent or waiver from public investors than from commercial banks or private placement investors. the project will incur negative arbitrage on funds raised in anticipation of construction costs not yet incurred (which can be a substantial financial penalty depending on the construction timetable and scheduled project draws and. and third. These events have adversely affected projects in emerging markets and have even resulted in the abandonment of capital markets financings for such projects at the eleventh hour. ECA/RDB/IBRD are "gap" fillers. Adapt and use U. currency or interest rate swaps. the investors are not as intrusive in the project as commercial banks or private placement investors. especially for multiuser infrastructure projects. 3. As noted. 4. 2. These enhancements can be tailored to suit the specific situation and. from a project sponsor's viewpoint. the capital markets are not particularly receptive to project financing during construction of a project for three principal reasons: first. except that they cannot/do not provide letters of credit or commodity. Reinvent "older" infrastructure finance securities. using "shadow" equity and puts/calls to provide floors/ceilings on an investor's return). Because they usually finance projects that are complete and have demonstrated operational performance. the investors do not competitively price the construction risk that they would assume. Possible Innovations We offer the following five suggestions for possible innovation in infrastructure finance: 1.. Use equity enhancements to reduce debt service requirements yet maintain an investor's return. insofar as they provide cover against certain risks which construction lenders will not assume (e. which have demonstrated flexibility and creativity in balancing political. political risk). While the private placement market is somewhat credit rating-sensitive.g. and occasionally "cheap" money. Exploit the opportunities of project finance to isolate and encapsulate embedded risks in order to take advantage of the most cost effective solution thereto. However. second. because of the subsidization of their export promotion/development activities. requires at least one rating. unreliability of the capital markets as an alternative to project financing by commercial banks. on the applicable spread between interest paid to investors and interest earned on funds invested).

Return to article "Role of Commercial Banks in Project Finance. an international law firm. 1995. nor exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act (which provides an exemption from the periodic reporting requirements under the Exchange Act for companies that furnish to the SEC information which is provided to security holders or is publicly disclosed or filed with any local . Platt.Return to article Enron's Dabhol project in India is a current illustration of these risks.. 3. 1.Return to article Project Finance International. U.Return to article Id. 7. Washington. 11 ff.Return to article World Bank's "World Development Report 1994" at p.Return to article Proceedings and Documents of the United Nations Monetary and Financial Conference." Project & Trade Finance. Vol. banks. J. Brown & 2. 22.Return to article Id.C. 15. No. 1995 at p. 3.O. 8. 13. p. at p. If the issuer is neither subject to the reporting requirements of the Securities Exchange Act of 1934. 5." Independent Energy. 17. as amended (the "Exchange Act").P. Issue __.G. registered investment company or pension or employee benefit plan). 2. October __. Our optimism stems primarily from the need to be innovative in order to raise more capital for the compelling infrastructure requirements around the world. D. Paul Forrester. 11. 4. Partner 1. back to top Article by: J." October 1994.." The Financier: ACMT. __. and S." The Financier: ACMT. Raymond Tillett are partners in the Chicago office of Mayer.Return to article Traditional private placements in the United States are made in reliance upon Section 4(2) of the Securities Act or Regulation D adopted pursuant to the Securities Act. 9.Return to article Id. Raymond Tillett. Brown & Platt colleagues for their contributions to this paper. 1.Return to article A QIB generally is defined as an institution (such as an insurance company. QIBs also include U. 4. Paul Forrester and S. September 27. The authors would like to thank their Mayer. acting for its own account or for the account of other qualified institutional buyers that in the aggregate owns and invests on a discretionary basis at least $100 million ($10 million in the case of registered dealers) in securities of unaffiliated companies. Brown & Platt or any of its clients. 1948. June 1995 at p.Return to article Public Works Financing's "1994 International Major Projects Survey.Return to article "Capital and Sophistication Shortage Concerns Sponsors. The views expressed in this paper are the authors' and should not be attributed to Mayer. 92. Conclusion While somewhat frustrated with the lack of recent innovation in debt finance for infrastructure projects. 16. 10.Return to article "Smashing the Infrastructure Bottleneck. 86. No.V. Vol. Vol. The right to obtain the information will generally be contained in a covenant in the terms of the security. 1. 14. 2. Issue 81 at p. Partner. May 1995. at p. at pp.Return to article "World Financing Trends. 7. 6. savings and loan associations and registered broker-dealers.Return to article "Financing Infrastructure Projects in the International Capital Markets: The Tribasa Toll Road Trust. October 1995 at p. including securities issued or guaranteed by the United States government.Return to article The availability of Rule 144A is conditioned upon sellers and prospective purchasers of Rule 144A securities having the right to obtain certain non-public information about the issuer. we are nevertheless optimistic about the prospects for future innovation in this area. August 1994." Project Finance International.S. 12.S. 89.

Issue No. Because the appropriation of moneys to pay debt service is not binding on future legislative bodies. 29. Issue 82.Return to article "Infrastructure Finance Adopted for Global Markets" from S&P's CreditReview"Global Project Finance. lease/appropriation-backed obligations are obligations that. June 26. February 1994. Jason Kravitt." March 1995 at 27. 1. 1995 at p. and similar financial statements for such part of the two preceding fiscal years as the issuer has been in operation (the financial statements should be audited to the extent reasonably available). 2.Return to article "World Bank Told to Pick Up Pace of Guarantees. 3. No. bonds. 28. editor (Prentice Hall Law & Business. Vol. including bankruptcy risk. 23. 55. An additional factor that favors reliance upon the capital markets for the financing of infrastructure is the possibility of obtaining an investment grade rating from one or more of the principal U. 27.Return to article For example. In contrast.S. 22. 25. at p. 25. 25. like G. 26.Return to article "The Securitization Challenge.Return to article "Financing Infrastructure Projects in the International Capital Markets: The Tribasa Toll Road Trust. 1.Return to article Registration statement on Form F-1 filed with the Securities and Exchange Commission on June 19. IFC makes loans to a borrower both for its own account ("A loans") and for the account of commercial banks and other financial institutions ("B loans") who participate therein. rating agencies. 31. 30. August 1994. September 21." The Financier: ACMT. lease/appropriation obligations are generally not . December 1993 at p." Wall Street Journal. January 30. See also "Privatize the World Bank." Business Week. June 1995 at p.S. 33-93118. it must make available." Institutional Investor. October 16. 4. See also "ECGD Breaks Securitization Deadlock. 97. New York. are tax-backed indebtedness. 1995. lease/appropriation obligations are subject to the continuing right of the municipality's legislative body to appropriate moneys (usually on an annual or bi-annual basis) as part of the budget process to pay the principal and interest on the obligations. 19. to the holders of any privately placed securities and any prospective purchasers the following information (which must be reasonably current in relation to the date of resale): (i) a very brief statement of the nature of the business of the issuer and the products and services it offers and (ii) the issuer's most recent balance sheet and profit and loss and retained earnings statements. stock exchange in the issuer's home country). rating agencies will consider providing an investment grade rating for debt securities issued in a structured financing or securitization that properly isolates certain risks." Project Finance International. provides the protective "umbrella" of its preferred creditor status to such banks and institutions. September 28." Project Finance International. 1995 at p." March 1995 at 27. 1995 at p. 1995. Tab 1211 at p. Vol. See Chapter 7.Return to article "Securitization of Project Finance Loans and Other Private Sector Infrastructure Loans." Thompson Publishing." Project & Trade Finance.Return to article "OPIC Presents Flexible Approval."Securitization of Financial Assets. 21. Issue 82. October 11. 49. May 1995 at p. 16 and "First-Daiwa Securitizes MAS. Issue 81 at p.Return to article "Infrastructure Finance Adopted for Global Markets" from S&P's CreditReview"Global Project Finance.Return to article "A Call for Funding Reform. May 11." IRF Transport Finance. 1. bonds. pension funds and other managed assets are typically restricted from investing in below-investment grade obligations so that the prospect of structuring a securitization to receive an investment grade rating broadly expands the pool of eligible investors. October 10. IFC remains the lender of record and.S.O. 4.Return to article "Infrastructure Finance Key to IFC's Year. 1991). "World Bank Told to Pick Up Pace of Guarantees. to G. 1. U. 28. Issue 72. 1995 at p." Engineering News Record. upon request. 1995 and "The World Bank's Lonely Defender. No." Project Finance International." The Financier: ACMT. 20. 24. The U." Project Finance International. 1995.Return to article "World Bank" in "Guide to Export and Project Financing. "Rating Agency Requirements. and that complies with published rating criteria. 1995 at p.O. 6. accordingly. though.Return to article "The Returns of Risky Business.Return to article Under its B loan program. Registration No." Project & Trade Finance.18.

the possibility that the public body will refuse to appropriate moneys to pay debt related to a flawed or unacceptable facility is increased. and revenue bonds.O. bond capacity available for other more important purposes (whether measured from a public policy or political basis). In structuring lease/appropriation obligation financings. As a result. Finally.O. Second are considerations of the project or construction risk involved in acquiring and constructing the facility. analysis focuses on the factors listed in the discussion of G.considered "debt" under the applicable state law. Other structuring techniques involve the creation and funding of debt service reserve and other reserve funds expressly dedicated to the lease/appropriation obligation. To the extent that these risks are significant or are not properly addressed. public bodies are often driven to utilize this type of financing in order to avoid the need for a public referendum that would be required to issue G.O. facilities financed by lease/appropriation obligations typically have shorter amortization periods than comparable facilities financed by G. hence. First among these is a determination that the facility to be financed is essential to the municipality's general governmental operations and purposes and. other considerations come into play. Thus. would be difficult to abandon. protections and procedures common to project finance such as payment and performance bonds. bonds or to otherwise keep the public body's G. inspecting architects and a close monitoring of the construction fund disbursement process are used.O.Return to article . bonds (since these obligations are essentially "taxbacked"). in order to guard against the risk of the public body failing to appropriate moneys to pay the debt service. However.

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