The monoline business that became prevalent across global infrastructure bond issuance developed out of the US municipal bond market. Prior to the recent economic turmoil, an estimated 30 percent of municipal issuance had a guarantee from a monoline insurer (see the next section for a discussion of the monoline product). However, the use of monoline insurance was not spread evenly across the market but was focused on smaller issuances, smaller states, or smaller issuing entities where investors relied on the due diligence performed by the monolines rather than their own.
The fact that only about 30 percent of the market relied on the monoline guarantee has meant that the limited monoline offering available now has not led to an overall collapse of municipal bond issuance. Instead, the limited monoline offering has made issuance much more difficult for the smaller issues.
Table 3: Factors determining the choice of wholesale debt
Factor | Consideration |
Size | • Commercial debt has no minimum size; transaction costs are the constraining factor. But there will be a market capacity for any one project or transaction. This is currently around US$2 billion, but will vary substantially by market, sector, and geography. |
| • Public bonds are typical for issuance greater than US$100 million. |
| • Private placements are typical for issuance less than US$100 million. |
| • Capacity in index-linked market is variable, so this is best considered on a transaction-by-transaction basis. |
Term of required debt | • Banks reluctant to lend beyond 25-30 years and in current market significant lending is now at 5-10 years. |
| • Bonds continue to offer much longer tenors. |
Risk profile | • Can you achieve investment grade (BBB-)? If not, the bond market is not an option. |
Nature of cash flows | • The bond market is better suited to stable cash profiles, since the product is less flexible. |
| • Bank market loans can be more flexible and thus easier to change, and so can be better suited to new, start-up businesses. |