Cross-Border Infrastructure: A Toolkit
Raising Resources
Corporate Debt
Session on Finance
Sidharth Sinha
Indian Institute of Management, Ahmedabad
The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
Cross-Border Infrastructure: A Toolkit
Financial Markets
Money
Primary
OTC
Markets
Markets
Secondary
Markets
Cross-Border Infrastructure: A Toolkit
Primary Bond Markets
Investors
Government
Issuers
Money
Primary
Bond
Markets
Money
Government
Firms
Firms
Households
Bonds
Bonds
Cross-Border Infrastructure: A Toolkit
Secondary Bond Markets
Investors
Government
Investors
Money
Secondary
Bond
Markets
Money
Firms
Households
Government
Firms
Bonds
Bonds
Households
Cross-Border Infrastructure: A Toolkit
Financial Intermediaries
Company
Obligations
Funds
Intermediaries
Banks
Insurance Companies
Brokerage Firms
Cross-Border Infrastructure: A Toolkit
Financial Intermediaries
Intermediaries
Obligations
Funds
Investors
Depositors
Policyholders
Investors
Cross-Border Infrastructure: A Toolkit
Debt Terms and Conditions
• Face value (principal)
• Maturity
• Coupon rate/Interest rate
• Repayment
• Security
• Seniority
Cross-Border Infrastructure: A Toolkit
Maturity
• Call provision

Issuer right to buy the bond back at a set price
 Right exercised at low interest rates
 Issuer can call the bond and borrow at cheaper rates
• Put provision

Investor right to sell the bond back at a set price
 Right exercised at high interest rates
 Investor can redeem the bond and invest the proceeds
at a higher rate
Cross-Border Infrastructure: A Toolkit
Interest Rate
• Fixed
 Interest fixed for the life of the bond
 Bond value fluctuates with market interest rates
 Bond value converges to face value at maturity
• Floating
 Interest defined as a base interest rate, e.g., LIBOR
+/- spread
 Bond value = face value after interest reset
• Fixed/floating interest rate can be changed using interest
rate swaps.
• Zero coupon or deep discount bonds
• Frequency of interest payment
• Moratorium on interest payment
Cross-Border Infrastructure: A Toolkit
Foreign Currency Bonds
• Interest rate and principal are fixed in foreign currency

Issuer subject to foreign currency risk due to change in
the value of the foreign currency

Can be hedged using derivatives – forwards or swaps

If interest rate parity holds then the domestic currency
cost of the foreign currency bond after hedging should
be equal to the cost of a domestic currency bond.
Cross-Border Infrastructure: A Toolkit
Default Risk
• Debt has the unique feature of allowing the borrowers
to walk away from their obligation to pay, in exchange
for the assets of the company.
• “Default risk” is the term used to describe the likelihood
that a firm will walk away from its obligation, either
voluntarily or involuntarily.
• “Bond ratings” are issued on debt instruments to help
investors assess the default risk of a firm.
Cross-Border Infrastructure: A Toolkit
Corporate Debt: Some Terminology
• Prime rate - Benchmark interest rate charged by banks.
• Sinking fund - Fund established to retire debt before
maturity.
• Subordinate debt - Debt that may be repaid in
bankruptcy only after senior debt is repaid.
• Secured debt - Debt that has first claim on specified
collateral in the event of default.
• Investment grade - Bonds rated BAA or above by
Moody’s or BBB or above by S&P.
• Junk bond - Bond with a rating below BAA or BBB
Cross-Border Infrastructure: A Toolkit
Corporate Debt: Some Terminology (continued)
• Eurodollars - Dollars held on deposit in a bank outside
the United States.
• Eurobond - Bond that is marketed internationally.
• Private placement - Sale of securities to a limited
number of investors without a public offering.
• Protective covenants - Restriction on a firm to protect
bondholders.
• Convertible bond - Bond with an option to convert into
a specified number of shares after a specified time.
Cross-Border Infrastructure: A Toolkit
IMF - Global Development Finance 2004
• Three issues to be addressed in tapping global & domestic
capital markets to meet the infrastructure financing needs of
developing countries:

First, a strong institutional framework for the protection of
creditors’ rights, effective covenants, and reliable avenues
of legal enforcement and remedy.

Second, growth, maturation, and stability in local capital
markets-these markets provide both long-term localcurrency financing and hedging against exchange-rate risk.

Third, a renewed effort to improve the creditworthiness of
public infrastructure providers-both to facilitate their access
to capital markets and to make private equity investment in
public-private ventures less risky.