10.11 Bonds are priced by reference to gilts (government debt), the relevant gilt being determined by the maturity and average life of the bond. To the gilt is added a bond marginal or "spread".
10.12 Bank financing is priced at a quoted interest rate known as LIBOR plus a bank margin. In order to achieve a fixed rate, the floating rate LIBOR is swapped into a fixed rate. The fixed rate is arrived at by reference to the relevant gilt(s), to which is added a swap spread and, generally, a risk spread, to give an all-in fixed rate. The bank margin is then added to this rate.
To take an example, assume pricing is off 20-year gilts:
Bond pricing: | 20-year gilt | 5.20% |
Bank pricing: | 20-year gilt |
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1 Subject to market fluctuations, underlying project risk and rating achieved
2 Subject to market fluctuations
3 To be negotiated with the bank handling the swap - usual range: 0.05% - 0.20%
4 Margin required by bank based on assessment of risks in the project - usual range: 0.8% - 0.9%