As a consequence of some of the regulatory tightening and the accompanying lack of competitiveness banks have felt in the syndicated loan market. We've seen some of the types of finance and grow. Bonds are becoming increasingly important, particularly in larger project finance deals. These are bonds which will have long maturities and they're typically structured, so they're outside of national government jurisdiction. They can be listed on exchanges like London or Luxembourg, but most trading is over the counter, so it's not traded on an exchange. But you go to a broker and you can sell a bond or you can buy the bond. They'll often have maturities of around 15 years for fixed rate bonds and up to 30 years for variable rate bonds. This is dependent on the market and it will change with market sentiment. So the bond issues are usually underwritten by banks, and all that means is the banks guarantee the funds. So if the banks can't sell the bonds on to bond investors, then the banks are left holding the baby. They may have an original issuer discount, and what that means is a little discount, which effectively improves the yield of investors.
There are other types of financing which are also important in project finance. The first is guarantees. These are effectively credit enhancements. This is where regular investors can't get comfortable with risk. So you may have quasi governmental institutions like the IFC or the World Bank or even the government providing some guarantees just to reduce the risk from an investor perspective. Letters of credit and standby letters of credit are often used where you are importing raw materials or exporting the product outside the country, and that could also be connected to export credit guarantees. In addition to the general syndicated loan structure, pretty much every transaction will have other facilities, a working capital facility, which funds the working capital in the project, a capital expenditure facility, which can fund initial or ongoing CapEx, a VAT facility, which funds the difference in timing between paying your value added tax during the construction period and reclaiming it during the operational period, and a standby facility, which is there in case your projections don't come true and you need to draw down on some emergency funding. Let's take a brief look at where project investment is happening. From an industry point of view, you can see it's dominated by oil and gas, power generation and infrastructure like roads and bridges. Notice that when you include renewable energy, power becomes the dominant type of investment. From a geographical perspective, you can see it's pretty widely spread across the world.
The terminology of project finance can get pretty confusing, so I'd like to give you some of the definitions that you will hear, build, own, and operate. This is where the private sector builds a project, owns it and operates it, and essentially keeps it forever. BOT or BOOT. This is where the private sector will build and operate the project, but then transfer it back to the public sector at a later date. Build own, operate, and sell, BOOS. This is where rather than transferring it back to the public sector, it's sold BLT, like the sandwich is build, lease, and then transfer. So you don't actually own the project. LOT is lease, operate and transfer. So this is not necessarily where you build a project, but you just lease it. So it could be an existing infrastructure asset. PFI is public finance initiative where you're using private money to fund public assets. And PPP is a public private partnership and this is where a combination of private sector and public sector is working together. There are lots of terminology items that you'll hear in project finance, and these are some of them.
