Financing characteristic | Bank Financing | Bond Financing |
Source of funds | Directly provided by a bank or possibly a group of banks that form a syndicate. | Funds provided by bond investors. A potentially disparate group that can include anyone from large financial institutions to individual investors. |
Arrangement of funds | Direct negotiations between the project company and the bank. | Arranged via an intermediary known as the bond arranger. |
Certainty of funds | Once the project company and bank reach an agreement there is certainty over receiving the funding. | There is less certainty with a bond. The project company will only know if funding is forthcoming once the bond arranger has started to try and sell the bond. The certainty is increased by appointing a bond underwriter to purchase any part of the bond not sold to other investors. |
Maturity | Currently up to around 30 years. | Can be up to 38 years. |
Repayments | Flexible. | Fixed (unless index-linked). |
| Repayments can be matched to project cashflows. | Repayments follow an annuity profile on fixed contracted dates. |
Flexibility | High. As the project company is contracting with a single bank, or group of banks, the financing can be flexible. It is possible to negotiate changes to the project, possible early repayment of the loan or refinancing of the project. Also, if the project runs into difficulties the project company can negotiate with the funders to try and avoid the project collapsing. | Very little flexibility. Due to the arms length, and potentially disparate nature of the bond holders in relation to the project company it is very difficult to make alterations to the project. It is virtually impossible to make early repayments or refinance a project. There is also no room for negotiation with regards to the payment of interest and capital. |
Receipt of funds | Staged. Banks will allow the project company to draw down the required funds as and when they are needed during the project. This means that the project company will only pay interest on the amount actually borrowed at a particular time. | Funds are received in one go at the time that the bond is sold to investors. The consequence of this is that interest will be paid on the total value of the funds from the beginning of the project. The project company needs to manage this and seek to minimise the costs by depositing the funds into an interest-bearing account. |
Assessment of project risk | The banks will undertake this risk assessment themselves during their due diligence work. The banks will therefore be in the best position to assess the risk and to price the funds accordingly. | Bond investors are in a weaker position to assess the project themselves and rely on the bond arranger to make an assessment of the project risk for them. |
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| As the bond investors are not always in a good position to assess risk the bond issuer may insure the bond to make the project more attractive to investors. |
Costs | Interest on the funds borrowed and a commitment fee for the available funds not yet drawn down. | Interest to the bond investors. An arrangement fee to the bond arranger. An insurance fee if the bond is insured. |
Ongoing project scrutiny | Significant. The bank will monitor the project carefully to ensure that it is operating viably. If the project runs into difficulty the bank may have step-in rights to actually run the project. | Very little. The bond investors have little influence on the project once it is funded. |
Optimum size | Few, if any, restrictions. | Approximately £100m - 400m - outside of this range there can be a dumbbell effect on the pricing of bond finance. |
Opportunities for refinancing | There may well be opportunity for refinancing if the project risks become less than those assumed in the initial financing. | Refinancing is unlikely to be possible as the terms of the financing are generally fixed for the life of the bond. |
Source: National Audit Office | ||