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Glossary

Infrastructure bonds

Category — Bond Types
Infrastructure bonds are bonds issued for the purpose of attracting financing for long-term infrastructure development projects (construction of roads, railways, ports, etc.).

Internationally, infrastructure bonds are presented in the form of municipal special-purpose bonds and corporate infrastructure bonds. The most developed market for such bonds exists in the United States, India, Australia, Chile, Kazakhstan as well as a few other countries.

In India, for example, infrastructure bonds are usually issued by banks. Two types of infrastructure bonds are common in this country: tax-saving bonds and regular income bonds. The first ones give the right to receive a deduction from the tax base for income tax, which is 20% of the investment amount. Regular income bonds are represented by pension, educational and other bonds. The disadvantage of the Indian infrastructure bond market is the lack of protection against inflation.

In the United States, the equivalent of infras
tructure bonds are Revenue bonds, which are municipal bonds issued for a specific project and secured with a source of income as a result of its implementation. The issuers of such bonds are state and county authorities. Most of the investments in bonds are made by pension funds. In Russia, municipal bonds are not used for financing infrastructure projects, since, as a matter of fact, municipal bonds are not infrastructure bonds; the timing of the placement of municipal issues does not exceed 5 years, which is insufficient for the implementation of infrastructure projects; municipal securities do not have the necessary degree of liquidity and no stable and regular payments are guaranteed under them; the high debt load makes it difficult for the municipalities to issue bonds.

Features:
• Funds are attracted for a specific project which means that securities are oriented on a narrow purpose;
• Infrastructure bonds are issued on the basis of a concession agreement or public-private partnership (PPP) agreement;
• Upon completion of construction, the issuer receives an infrastructure facility in a concession for a certain period of time, usually for several decades;
• Third parties may charge a fee for using the finished facility (for example, if it is a toll road);
• The main buyers of infrastructure bonds are institutional investors, namely pension funds, insurance companies, and credit institutions;
• Long circulation period due to the duration of the project (on average, 15 to 30 years);
• They allow you to finance infrastructure construction on preferential terms.

Advantages:
• Safety of bonds secured by guarantees of the state and municipalities on the territory of which construction is carried out, bank guarantees and sureties, pledge of rights under project agreements, etc.;
• Recoverability: payments to bondholders are secured by the issuer’s income from the operation of the relevant infrastructure facility;
• For the issuer: the possibility of raising funds for a long term at a low cost of borrowing compared to credit resources;
• Predictability of future earnings and the nature of collateral contribute to the assignment of a high rating over the circulation period of the securities;
• They are not strongly affected by fluctuations in the stock market.

Disadvantages: • Risks associated with the implementation of infrastructure projects (environmental, market-determined risks, risks associated with government regulation measures, etc.)
• Lack of representative information about the infrastructure bond market: "interconnection" of financing when issuers and buyers of bonds agree on terms in advance, as a result of which investor’s "premium" may differ from the market premium; difficulties in accounting for infrastructure projects. For new issuers, this creates difficulties in attracting bond investments on favourable terms.
• A shortage of projects for this type of financing, since traditionally, the project model includes lending as a financing mechanism, which initially limits the possibility of another method of raising funds.
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