Bonds and loans are both financial arrangements that fund corporations through a pre-agreed payment plan, timeline, and interest rate. The traditional loan obtains money from a single source lender or a consortium of selected lenders. Periodic loan repayments are made based on principal plus interest to its lender over the life of the loan ranging even up to ~25 years. Moreover, mini perm loans allow borrowers to refinance the loan within ~3-7 years from project operations commencement, effectively reducing the loan tenor in return for comparatively relaxed initial pricing terms. The mini-perm structure is quite popular in the region as it helps developers secure cheaper capital for the initial few years while assuming refinancing risk.
Bonds offer longer financing terms with fixed interest rates, attracting a range of investors like institutions, pension funds, and high-net-worth individuals. Issued through a special purpose vehicle (SPV) with its own credit rating, bonds are designed for distribution and project management.
There are benefits and drawbacks to each financing option. Project Bonds have a fixed price and rate allowing the issuer to lock finance costs. Similar to a loan, periodic interest and principal payments are made by the originator to its bondholders matching the cashflow profile of the project. With the extensive pipeline of projects, specifically in KSA and UAE, refinancing is a challenge. It is essential for bank market capital to be available for investment in greenfield projects. Bond refinancing offers an advantage and additional source of low-cost long-term liquidity.
Bonds are not without disadvantage. Once fixed, they are difficult to restructure, while loans are easier to restructure. When a company sells bonds, time and investment are also needed to advertise and comply with SEC requirements, requiring higher upfront cost.
Refinancing is complex and restrictive. Bonds are an alternate refinancing option allowing MENA to capitalize on growing investor markets.