Between climate, infrastructure and yield: project bonds are reshaping bond investing
The view of IVO Capital Partners
- Tangible assets generating predictable and stable cash flows, supported by a solid regulatory framework and long-term contracts.
- An attractive return for a controlled risk profile thanks to a secured bond and a package of protective covenants.
- A vector of diversification compared to traditional allocations in developed markets.
When a new airport opens, a solar farm begins producing energy, or a highway network expands to open up a region, these projects don’t just happen. Behind every essential infrastructure lies a major financing challenge. Governments, often constrained by budgetary constraints, cannot carry everything alone. This is where project bonds come in, a financing solution that allows investors to actively participate in the development of strategic assets while benefiting from an attractive return.
Project bonds: an investment tool anchored in economic reality
Project bonds are specific debt instruments issued to directly finance strategic infrastructure: ports, airports, renewable energies (solar, wind, hydroelectric), and energy projects such as FPSOs (Floating Production Storage and Offloading).
What are the advantages of project bonds for investors?
1. Tangible and strategic assets
In a world where uncertainty is omnipresent, holding physical and strategic assets is a resilient approach. The infrastructure financed by project bonds—ports, airports, renewable energy (solar, wind, hydroelectric), and transport infrastructure—is essential to the economic development of emerging countries. These investments not only improve connectivity and access to essential resources, but also create local jobs and strengthen the energy and industrial sovereignty of the regions concerned.
Project bonds benefit from a robust security framework thanks to multiple guarantees that reduce credit risk and strengthen investor confidence. These bonds are generally backed by the assets they finance, which provides tangible coverage in the event of default (senior secured notes).
Furthermore, these projects often benefit from the support of major international financial institutions, such as the World Bank or the European Bank for Reconstruction and Development (EBRD), which helps strengthen their economic viability and long-term stability. Project bonds are also distinguished by their ability to align the interests of investors and local stakeholders, thus ensuring a sustainable economic impact and rigorous management of the financed infrastructure.
2. Clearly defined purpose financing, predictable cash flows and aligned amortization
Projects are typically defined and secured through a long-term contract (e.g., airport concession agreements, PPA contracts, etc.) that defines the terms of sale with off-takers. Unlike corporate bonds, which can finance a variety of objectives (capex, acquisitions, dividends), a project bond exclusively serves a given project. This ensures increased transparency and better control over financial flows. In addition, rather than a repayment at maturity (“bullet”), project bonds are often sinkable, with a gradual repayment over the life of the bond that is aligned with expected future cash generation. This structure significantly reduces the risk of refinancing at maturity of the bond. The financing structure includes reserve accounts guaranteeing the availability of cash needed to service the debt. Project sponsors are also financially committed, which incentivizes them to ensure the economic viability of the financed infrastructure. Strict financial covenants defined in the prospectus (“offering memorendum”) govern the management of the project by imposing restrictions on additional debt and protecting the financial stability of the issuer.
3. Diversification advantage and attractive return for a secure profile
Project bonds allow us to gain exposure to sectors that are underrepresented in traditional high-yield bond allocations in developed markets, as these types of bonds are generally rated investment grade or these projects are financed by infrastructure funds via private debt. In the emerging corporate bond universe, this type of project generally has its rating capped by that of its sovereign, so these issuers are impacted by their postal code despite their quality profile.
Furthermore, project bonds offer an attractive yield premium, also because they are often issued by new entrants to the bond market. This phenomenon, called the “new issue premium,” reflects the need for these little-known issuers to attract investors, thus creating an opportunity for additional returns.
At first glance, these bonds may appear highly leveraged, which may deter some investors. However, a closer look reveals an accelerated deleveraging mechanism. The initial debt is naturally high, as the funds raised are immediately injected into the project. However, the structure of these bonds is designed to ensure rapid debt amortization: the cash flows generated are directly allocated to repaying the borrowed capital. This alignment between cash flow generation and debt servicing gives project bonds a better-controlled risk profile than it might appear at first glance, while maintaining attractive returns for investors.
What are the risks of project bonds for investors?
Project bonds are often based on concession contracts or power purchase agreements (PPAs) entered into with public or semi-public entities. An adverse regulatory change, a modification of concession conditions, or a decision by the off-taker not to honor its contractual commitments can affect the economic viability of the project and the issuer’s ability to service the debt. This risk is particularly acute in jurisdictions with unstable legal and regulatory environments. To mitigate this risk, it is essential to assess the strength of the contractual framework, the associated guarantees, and the public counterparties’ track record of meeting their commitments.
Beyond these regulatory and contractual uncertainties, project bonds are also exposed to risks inherent in each phase of the project. From design to construction and operation, each stage presents specific challenges. The construction phase is generally the riskiest, as any delays or unforeseen additional costs can only be absorbed by the project’s future cash flows once it is operational. It is therefore essential to analyze the sponsor’s strength and the operator’s expertise upfront to ensure their ability to successfully complete the project.
Project bonds: a lever for sustainable financing?
The emerging world accounts for 85% of the world’s population and 75% of total greenhouse gas emissions. By financing green infrastructure (wind farms, solar power plants), project bonds contribute to improving local infrastructure and impose strict governance standards. By integrating ESG criteria, project bonds allow investors to engage in responsible investment. In particular, these instruments are aligned with several United Nations Sustainable Development Goals (SDGs):
- SDG 7 : “ Ensure access to affordable, reliable, sustainable and modern energy for all .” Renewable energy project bonds finance projects that reduce dependence on fossil fuels.
- SDG 9 : “ Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation .” Funding helps develop critical infrastructure in areas where it is lacking.
- SDG 11 : “ Make cities and human settlements inclusive, safe, resilient and sustainable .” Building transport, water supply or clean energy infrastructure improves the quality of life of local populations.
- SDG 13 : “ Take urgent action to combat climate change and its impacts .” By reducing the carbon footprint, project bonds aligned with green initiatives directly contribute to the energy transition.
Additionally, these bonds often include strict ESG reporting mechanisms, ensuring that funds are allocated transparently and aligned with sustainable commitments.
The example of project bonds serving the energy transition: the rise of renewables in India
India fully embodies the energy transition dynamics underway in emerging countries. The country had approximately 203 GW of installed renewable energy capacity at the end of 2024, and is targeting 500 GW by 2030. This ambitious trajectory reflects strong political will and the sector’s growing attractiveness to international investors. It is accompanied by massive needs for green infrastructure—solar parks, wind farms, and storage solutions—which can be effectively financed through project bonds.
Players like Continuum Energy, Greenko, and Sael illustrate this dynamic: these Indian companies develop and operate large-scale renewable energy projects, often backed by long-term power purchase agreements (PPAs), which makes them eligible for structured bond financing. These instruments make it possible to align financial returns with environmental impact, directly contributing to achieving the Sustainable Development Goals: access to clean energy (SDG 7), promotion of sustainable industrialization (SDG 9), and the fight against climate change (SDG 13).
Conclusion
At IVO Capital Partners, our bad country/good company approach is particularly suited to investing in project bonds, which notably represent 19% of our IVO EM Corporate Debt fund and 21% of our IVO EMCD Short Duration SRI fund. This universe combines discipline, security, and yield, offering an opportunity for savvy investors seeking to combine impact and performance.
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