1/100th of 1%. A measure normally used in the statement of interest rates; 100 basis points equals 1%. | |
A form of interest bearing security issued by governments, companies and other institutions - usually a form of long-term financing. | |
The price, usually expressed in basis points, of the bond above the reference gilt rate. The margin/spread represents the risk cost. | |
Financial institution that guarantees to buy the whole bond issue for a fee. Usually the same institution will also act as the bond lead arranger, the institution that finds buyers for the bond. In this project Warburg Dillon Read acted as both the lead arranger and the underwriter. | |
The make up of the funding employed in a business/project. It usually refers to the proportions of debt to equity or senior debt, subordinated debt and equity. | |
A measure of how well project revenues will cover debt servicing requirement over the lifetime of the project. | |
The rate of interest payable on a bond and other financial securities. | |
The internal committee of a financial institution that gives the approval for an investment to be made | |
An appraisal by a recognised rating service (e.g. Standard & Poor's) of the soundness of an investment. | |
The analysis and appraisal of a project prior to making an investment decision | |
The value of a company or project after all liabilities have been allowed for. The equity is owned by the shareholders. | |
A process whereby the financing for a project is obtained after a competition involving several potential funders rather than being provided by an incumbent funder retained by the project consortium appointed as preferred bidder. | |
Government securities traded on the London stock exchange. They are called gilt edged as it is certain that the interest will be paid and they will be redeemed on the due date. | |
The rate of interest paid on a government security. The gilt rate is often considered to be the risk free rate of interest because of the certainty that the interest will be paid. | |
Government Offices Great George Street. The offices currently occupied by HM Treasury. | |
An action to reduce exposure to risk. In this case the linking of index-linked funding to an index-linked unitary payment was an act of hedging. The contractors exposure to inflation risk was reduced as changes in the cost of funding will be matched by changes in revenue received. | |
A bond where the value of the interest payments and principal are linked to an index of inflation. | |
London interbank offered rate. The interest rate at which banks will lend to each other. | |
A term signifying an intermediate form of debt. It will usually be unsecured and comes below senior debt, but above equity, in ranking for payment in the event of default. Also often called subordinated debt (i.e. subordinate to the senior debt). | |
An institution that insures investors in the bonds guaranteeing that they will be paid. The effect of this is to enhance the credit rating of the bond to that of the Mono-line Insurer, typically AAA, the highest rating, which reduces the cost of the bond to the bond issuer. | |
The name given to a bond that has been insured by a monoline insurer. | |
A Government initiative introduced in 1992 to harness private sector management, expertise and finance in the delivery of public sector services. | |
The interest rate paid on the bond proceeds after the funds have been collected from the bond investors and the proceeds have been deposited into a bank account. | |
The debt that is ranked highest in terms of claims on project cashflows and therefore carries the lowest risk that it will not be repaid. | |
A credit rating agency that assesses the credit risk of governments, corporate entities, financial securities and projects. | |
See mezzanine debt. | |
The interest rate swap market is, among other things, used to change the basis on which interest is paid on an asset or liability. Most commonly a floating rate is turned into a fixed rate or vice versa. The fixed interest part of the swap will be related to the Gilt market. Thus a swap is an agreement between two parties periodically to swap interest rate payments, such that one is paying a fixed interest rate and the other a floating rate. | |
| The swap market developed to allow borrowers who were not considered sufficiently creditworthy to access the fixed rate bond market to lock into fixed rates of interest. This allows the borrower to mitigate against floating interest rate risk by swapping its floating rate debt for fixed rate debt. The borrower will receive floating rate payments from the swap counterparty (usually a bank) and will make fixed rate payments to the counterparty. |
| When quoting a swap price the convention is to quote a price at which the bank will pay or receive a fixed or floating rate payment. This is the swap rate. The swap spread is the swap rate less the yield on the reference Gilt. |
The process by which the number of banks or institutions which are party to a credit facility is increased. | |
The duration to maturity of a security, e.g. a bond. | |
The periodic payment that the public sector agrees to pay for the provision of services by the PFI contractor. |