4.1.1. Although efforts are being made to revive the monolines or replicate the monoline model (see below), it is useful to consider means by which an alternative unwrapped PPP bond model could be developed.
4.1.2. Chapter 3 of this document set out the difficulties with which the bond model is faced. Some of these - those in the first group in particular - will be addressed primarily by the passage of time. The valuation of existing wrapped PPP bonds will not change other than through the recovery of the ratings of the monolines that guaranteed them and write-downs will inevitably occur. The underlying credit quality of these bonds will be demonstrated over time, but the fact that they bear interest rates indicative of triple-A ratings when they are not of triple-A credit quality cannot be readily remedied. Similarly, the relative overweighting of infrastructure bonds in portfolios will diminish as the valuation of portfolios as a whole becomes clearer and fund managers can rebalance portfolios in a more stable price environment. The availability of simpler alternatives at attractive yields eased somewhat in the second quarter of 2009 as competition for these bonds drove down yields and issuance spreads have tightened by as much as 100 bps since March.
4.1.3. Addressing some of the constraints may require action from the PPP community - bond investors, equity sponsors, rating agencies, and the public sector. The constraints are not necessarily independent; the solution to one may help alleviate some of the others. For example, increasing the use of subordinated debt within PPP structures could help raise the rating of the senior debt, in addition to which, if the sub-ordinated debt provider, as first-loss risk taker, were to have controlling creditor status the difficulty of diffuse lender control could also be addressed.
4.1.4. To address the problem of valuation, financing documentation should contain requirements for regular reporting to bond investors of the same kind that bank lenders and monolines routinely receive. This would allow investors to make judgements about the performance of the issuers and to assess the likeli-hood of a future default independently of the rating agencies. In addition, without a guarantee, the rat-ings of issuers must be done on a public basis with a requirement placed on issuers to maintain ratings. With publicly available ratings and a good flow of project information, the market would be able to make a rational value determination. It must be noted, however, that this depends upon the willingness and capacity of investors to undertake risk analysis, and it would appear investors are still looking for a way to avoid the cost of developing this capability.
4 .1. 5 . As noted above, the single-A rating requirement may be difficult to achieve economically; however, this is an assumption based on the views of market participants rather than rating agency statements designed to ad-dress the current issue specifically. To address the bond investor rating hurdle properly, the market needs to have specific guidance from the rating agencies on their requirements to achieve the desired rating level.