Bond proceeds are usually received in a lump sum at Financial Close, but as the PPP Project's expenditure profile may vary, the Private Partner will need to invest these proceeds until they are actually required by the PPP Project over its construction period70. This typically results in a "negative carry" because the interest received by the Private Partner is generally lower than that paid to the bondholders (although this may be mitigated by an overall lower cost of funding). This contrasts with traditional bank financing where funds are drawn over the construction period as and when required.
In some circumstances (more likely in private placements), the bondholders may agree to staged drawdown of the bond proceeds (more in line with the PPP Project's expenditure profile). This means that bonds are only issued and subscribed for effectively as and when the funding is needed, rather than all being issued at financial close. While this may reduce the risk of negative carry, bondholders may require a higher return on their investment because they have to keep those funds available and are not able to freely invest them elsewhere. A staged drawdown structure will generally limit the universe of potential investors as only certain investors can cope with it. This is one reason why PPP Projects have been bank financed during the construction period and then refinanced by project bonds once financing is fully drawn and construction has completed so cash flow is being generated.
| EMERGING AND DEVELOPED MARKET DIFFERENCES A staged drawdown structure is less likely to be workable in an emerging market PPP Project. Similarly, while alternative solutions to reduce/avoid negative carry have been tried in developed markets, these are likely to be highly bespoke and only feasible for a certain class of investor in an established market. |
_____________________________________________________________________
70 In a bond financing, the proceeds are often deposited with a highly rated bank until required, through a fixed-rate deposit, to reduce the cost of servicing unutilised debt.