Subnational Capital Markets in Developing Countries: From Theory to Practice

By John Petersen; Mila Freire | Go to book overview

Chapter 6
Debt Instruments and
Methods of Sale

Debt instruments are the legal embodiment of a credit transaction, setting out the terms and conditions of the loan, including how the principal is to be repaid, how long a debt will be outstanding, and how interest is figured and paid. Method of sale considerations involve the procedures by which debt is offered to the final investors and the debt obligations exchanged for the bond proceeds.

The general parameters of what instruments should look like and how sales are conducted are often covered in a nation’s securities laws. As a rule, the pre- cise details of these matters are determined by the market. Financial markets are fluid, and what might be attractive one day can be unattractive the next. Inflexibility is costly. However, in new markets both the borrowers and lenders are often unaccustomed to the process and perhaps unwary of the risks.

A major concern at the national level is to avoid creating regulations that interfere with the flexibility of lenders and borrowers in structuring debt in ways that best suit both parties. This chapter examines several of the alternatives that may be used in the design (often referred to as structur- ing) of subnational government debt transactions. It describes debt struc- ture and illustrates the range of instruments available to suit the profiles of issuers and investors.


Maturity or Term of Debt

The maturity of a debt instrument refers to the period from the time the funds are borrowed to the time the principal is due to be repaid. The maturity should be matched to the economic life of the asset that the debt is financ- ing. Ideally, the amortization of the liability on one side of the balance sheet is matched by the depreciation of the asset financed on the other side. Thus

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