Looking at a huge infrastructure project pipeline in the Middle East, particularly in the GCC region, we expect the project bond market to flourish in the coming years. Local banks have been the traditional financer of such projects in the region. However, banks' tight balance sheets post the global financial crisis of 2008, scale back in lending from European banks, and strict Basel III guidelines offer a big window of opportunity for the MENA project bond market.

As opposed to the traditional project loans extended by banks, project bonds are traded in the secondary market. Project bond investors typically rely on the cash flows generated by the underlying assets. Most of the time, the proceeds from the issuance of bonds are used to finance single project or limited recourse project. These can be either greenfield or brownfield projects. Project bonds are generally secured in nature and therefore considered as safer than unsecured corporate bonds. They are commonly sold by power, transportation, and oil & gas companies. Most of the companies from these sectors offer stable and predictable cash flows.

There are a lot of reasons why investors would prefer project bonds instead of project loans going forward. The main reason being the long tenor associated with project bonds. Generally, project bonds can have 15 to 20 years of maturity. On the other hand, bank loans typically support projects with a maturity of up to 10 years. Whereas, project loans extended by banks charge floating interest rates, most commonly based on 3 month London interbank offer rate.

Another benefit for preference for project bonds is its ability to provide increased financial flexibility and diversification of capital. With fewer commercial banks lending for long term projects, project sponsors would naturally choose to diversify their sources of funding. We have a few trendsetters like Ras Gas and Dolphin Energy that have successfully placed project bonds in the debt market in the past. These issues managed to pull very strong interest form both local as well as international investors. TAQA, an Abu Dhabi government owned entity, is also mulling over to follow the trend and sell project bonds in 2013.

From retail investors' perspective, they can directly invest in project bonds where it is not possible for them to invest in project loans. Institutional investors are the only investors in project loans.

Global Investment management firms also expect that the local project bond market would drive interests from long term investors like pension funds and insurance companies. Once a decent number of successful issues are places, we could see increased activity in the project bond market. The increased activity would result in more deep, liquid and a mature market for both local and international investors.

On the negative side, project bonds take longer than bank loans to get placed. A project bond is time consuming as it involves a number of action items including rating of the bond, detailed due diligence, complying with regulatory and exchange related requirements. On the other hand, the bank loan is easy and less costly (project bond issuance fees can be considerable) to obtain even if it involves a group of banks.