1. 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.

2. Cross-Border Infrastructure: A Toolkit Financial Markets Primary Markets Secondary Markets OTC Markets Money

3. Cross-Border Infrastructure: A Toolkit Primary Bond Markets Firms Households Government Firms Government Money Bonds Money Bonds Primary Bond Markets InvestorsIssuers

4. Cross-Border Infrastructure: A Toolkit Secondary Bond Markets Firms Households Government Firms GovernmentMoney Bonds Money Bonds Secondary Bond Markets Households Investors

5. Cross-Border Infrastructure: A Toolkit Financial Intermediaries Company Intermediaries Banks Insurance Companies Brokerage Firms Obligations Funds

6. Cross-Border Infrastructure: A Toolkit Financial Intermediaries Intermediaries Investors Depositors Policyholders Investors Obligations Funds

7. Cross-Border Infrastructure: A Toolkit Debt Terms and Conditions Face value (principal) Maturity Coupon rate/Interest rate Repayment Security Seniority

8. 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

9. 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

10. 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.

11. 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.

12. 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

13. 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.

14. 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 local- currency 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.