New Approaching to PPP and Infrastructure Projects: Project Bonds


The Project bonds which is an alternative for project finance, is a quite new method in Turkey while it is commonly used in the world. In this review, the general feature of the project finance method will first be explained and following the explanation, the differences between traditional banking finance and project finance methods will be discussed by making a comparison.


Project bonds are financing methods that exist since the beginning of the nineties and its area of usage is especially widened after the global crisis. Despite being generally used for infrastructure projects, the project bonds that are seen as a powerful alternative to bank loans, are also suitable fund resources for all other industries. Project bonds, as capital market instruments, have the necessary qualities to fulfill the expectations of infrastructure projects, especially the ones that need major financing. In this context, a need of research has arisen in the use of project bonds both locally and globally.

A Comparative between Project Bonds and Bank Loan

The project bond method, which is being used increasingly nowadays, is a source of funding for investors as an alternative to bank loans. This funding source has not been used often until the global crisis, and the usage has become widespread in the post-crisis duration, as can be seen from the statistics.

If it is necessary to order the characteristics of the project bonds, project bonds are the fixed-rate financial instruments, in this context, they are more advantageous comparing to the bank loans. Because unlike the bank loans, the increasing payments and the interest rate swap for the delay has not been regulated in the bonds. In addition to this, project bonds are in demand by the investors who prefer long-term investments in the industry, in this regard it is preferred for the transactions with a due date more than twenty years. Also, it should be noted that more flexible guarantees compared to loan contracts are observed in project bonds which are subject to less daily supervision. Amortization flexibility is an aspect that stands out as highly important investor evaluations. With their extensive payment free period opportunities, project bonds offer flexibility in the amortization structure as well. In addition to all these, project bonds entail a fast process with regards to rating process, expected issuance period of the bond is eight to twelve weeks. Make-whole can be requested in the case that a make-whole provision is included in project bonds. Such a proceeding would make the refinancing more difficult for the issuing company. While the aspects noted above are the reasons of preference for project bonds.

Insurance companies, asset managers, infrastructure borrowing funds and local investors make the target group of investors for project bonds. The process of is- suing a project bond can be analyzed under three main headings.

  • a two-three weeks long scoping process,
  • a four-five weeks long document preparation and rating process,

a two-three weeks long advertisement and closing process.

Considering the advantages of the project bonds, it is considered an alternative funding source especially for public-private partnership projects. The difficulties in long-term lending operations due to strict regulations enforced on bank balance sheets is the main reason for banks not to prefer the project bonds as a primary source in long-term projects. In such situations, the project bonds become a preferred alternative to traditional bank loan processes.

A long-term period is foreseen by providing appropriate pricing and long risk-free funding on project bonds. In traditional bank loans, a short due date is anticipated which holds the risk of being refinanced. However, while there are fixed rate funds at the project bond, there are variable rates for bank loans. This situation creates a risk for the investor. In addition, conversely to the bank loans the project bonds save the investor from prepayment conditions, which are organized considerable amounts. While the banks are being considerably involved into the project, when the project bonds are used, no such situation arises. This is because the bondholders are in a passive position. In addition to all these, the long negotiation period on bank credits and the demand for heavy guarantees do not raise in project bonds. Comparing to bank credit, flexible guarantees are demanded. The last question that needs to be mentioned is about interest rates. Currently, as it is known, high-interest costs are foreseen in bank loans. However, for the project bonds, contrary to the bank loans, there are low-interest costs.

Project Bond Bank Credit
Long Term Period Short Term Period
Fix Ration Funding Variable Rate
No Chance For Prepayment Pre-payment Requirement
Less Project Involvement More Project Involvement
More Flexible Assurances Long Negotiation Period and Strict Assurances

De Lege Ferenda!