Bonds are commonly issued during infrastructure projects. The company holding the equity stake is generally the one issuing the bonds. This means that the company owning equity is the one actually borrowing money from the bondholders and, therefore, the one owing the money back.
Even though the responsibility of repaying the loan lies with the infrastructure company, it is not the only one involved in the issuance as well as servicing of debt. Infrastructure companies require a full team of specialists to help them in the various tasks required to issue and manage debt instruments.
The different parties which are involved in the process, as well as the role which is played by each party, have been explained in detail in this article.
Lead Arranger: Infrastructure companies usually hire investment banks to play the role of the lead arranger. The role involves taking the lead and being responsible for the underwriting and distribution of the entire debt issue.
Lead arrangers may or may not serve as the underwriter for the infrastructure bonds being issued. In case they do serve as underwriters, they are contractually bound to buy the bonds from the issuer. Usually, underwriters first enter into agreements with investors. Once they have these agreements in place, they use the same to enter into an agreement with the infrastructure company. In reality, they are only acting as an intermediary. The only risk that the bear is that they will be left with the bonds in case any of the parties that they signed the agreement with reneges on their promise.
Trustee: Most infrastructure bonds which are issued involves the use of collateral. It is important to monitor the collateral in order to protect the interests of bondholders. This role is played by the trustees. They are the ones who keep an eye on the collateral and ensure that the underlying assets are not liquidated, thereby harming the interests of the bondholders. In theory, a trustee is supposed to be an independent third party. However, in real life, trustees are appointed by the issuers and hence are more inclined towards them. However, in strictly legal terms, trustees have responsibilities towards the issuer as well as the bondholders.
Paying Agent Fiscal Agent: Paying agent and fiscal agents are appointed by the issuer in order to track the proceeds which have accrued as a result of the sale of bonds. The difference between the two is that fiscal agents only have responsibilities towards the issuer, whereas a paying agent has responsibilities towards both the parties. These agents are responsible for ensuring that the special purpose entity has enough cash flow to make good its promise of timely periodic interest and principal payments to the bondholders.
Monitoring Advisor: The role of the monitoring advisor is to reduce the technical complexity and appraise the investors of the current financial situations. Infrastructure projects tend to be quite technical. On the other hand, investors have financial expertise and are not well versed with the technical side. Hence, a monitoring agent is appointed to act as a liaison between the two parties.
The role of the monitoring agent is to understand the project from a technical point of view and explain the same in financial terms to the investors. Monitoring advisors are supposed to help special purpose entities comply with financial terms and covenants which have been listed in the bond agreement. Monitoring agents conduct on the ground checks for the investors, which is important in order to safeguard their investments.
Listing Agent: As their name suggests, the job of a listing agent is to help the infrastructure company list their bonds on different exchanges. Each exchange has rules and regulations which need to be complied with in order to allow listing. In larger bond issues, such listing is considered to be very important since it provides secondary market liquidity to the investors. Listing agents have expertise with the rules of stock exchanges and hence can make the listing process much easier.
Attorneys: Both the investors as well as the infrastructure company generally have their own team of lawyers, which help them draw up a contract. Each side tries to include clauses that protect their interests. The final agreement is the result of several rounds of negotiations between both the legal teams. In some cases, the same lawyers represent both the issuers as well as the investors!
Auditors: The services of auditors are required extensively in infrastructure projects. This is because whenever bonds are being issued, the issuer provides certain financials. The accuracy of these financials needs to be verified in order to ascertain the creditworthiness of the project. Similarly, during periodic reviews, the issuer submits the income statement and the balance sheet of the project. This also needs to be verified in order to assure the investors that their investment is being safeguarded.
The bottom line is that bond issuance is actually a complex process that requires several roles to be played. It is not necessary that each role has to be played by a different party. Sometimes the same company can play three or four different roles. However, all these roles also involve costs that make bond issuance an expensive process.
