Another common form of debt is subordinated debt. This is debt that is subordinated to equity. In many ways the "debt" label is misleading, because its structure is often more akin to equity than to debt, and it is often in the form of loan notes or, sometimes, preference shares.
TAKE-AWAYS | |
Commercial debt | Capital markets |
• Commercial debt markets are currently in a state of flux, but the underlying principles of how they approach and price infrastructure opportunities remain the same. • When to bring banks into a transaction, how they will organize themselves, and how they will price the debt and set the terms of the lending will vary from transaction to transaction, but some basic principles remain steady- such as how debt is priced. • In a number of circumstances, public authorities should understand the terms of the debt, not solely because of pricing but also to ensure full understanding of deliver- ability and robustness of the debt as well as their liabilities and obligations. | • The process of issuing bonds through the capital markets is more structured and regulated than the process of arranging commercial bank debt. • Most bonds are issued on public markets, although some are offered as private placements. • The way debt is priced and brought to investors in capital markets is different than it is in commercial debt markets; for example, capital markets have credit-rating requirements. • The capital market is currently a limited option for infra structure because of external failures such as the down fall of the monolines (see the last section of this chapter). |
The municipal bond market in the United States • The municipal bond market in the United States shows how government policies-in this case tax policy-can drive the funding options for infrastructure and the potential use of private finance. |
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Other debt | |
• There are other sources of debt that may sit between the senior debt and equity. Its structure and pricing will depend on the risk it is taking, including elements such as where it sits in the repayment priority. | |
Monoline insurance | |
• The collapse of the monoline business model has impacted both existing and future transactions. • The infrastructure sector has been hit hard because by nature infrastructure bonds are low investment grade, which attracts fewer potential investors than higher-rated opportunities. |
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