Magazine article Global Finance

Junk Gets Respectable

Magazine article Global Finance

Junk Gets Respectable

Article excerpt

Junk bonds look set to take the project finance market by storm. "We have 6-7 below-investment-grade bonds in the hopper from Latin America, the United States, and Europe," says Paul McKeon, managing director at BT Alex. Brown, which underwrote ABB Asea Brown Boveri's recent $235.2 million, 10-year nonrecourse issue for Monterrey Power in Mexico. That's a huge number, considering that only about 30 such issues have been sold since the first subinvestment-grade project bonds debuted in 1995. Rumored junk issuers waiting in the wings of the project market include Russia's natural gas giant Gazprom and Italian construction company Astaldi, which is building a motor way in Croatia. Banks looking to gain a foothold in project finance through junk issues include Merrill Lynch and Morgan Stanley Dean Witter.

Driving the interest is an unusual confluence of necessity and appeal. Many projects that could have been financed as investment-grade issues a year ago have suffered rating drops because of countrywide credit downgrades. Also, credit ratings of commodity-based projects dropped below investment grade as raw material prices collapsed over the last year.

At the same time syndicated loan capacity is shrinking as banks merge and combine project finance capacity The huge write-offs some banks have taken for non-performing Asian loans have dulled appetite, too. That means projects that might have tapped bank financing last year no longer can.

On the flip side, sponsors like noninvestment-grade project bonds. They offer a longer payback time than bank loans. And with the US treasury yield (the jumping-off point for the Monterrey deal) so low, sponsors pay less than they once did for investment-grade financing.

For bankers, the appeal of junk project bonds are lucrative 2% commissions, about double the fees available in the syndicated loan market. …

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