The Design and Estimation of a Bi-National Bond to Finance Strategic Infrastructure along the U.S.–Mexico Border

Abstract

The magnitude of funds needed to improve infrastructure along the U.S.–Mexico border has substantially outstripped the sources, resulting in a deteriorating environment and border security and placing the inhabitants at risk. Traditionally, the federal government in each country allocates a small budget to the North American Development Bank (NADB), a bi-national institution that manages infrastructure development. This article defines a bi-national bond that can be issued by the NADB in U.S. dollars and/or Mexican pesos and estimates the spread for default risk and premiums for the built-in hedge against adverse movements in interest rates and exchange rates. As of May 2012, the authors estimate a B rated, two-year zero, bi-national bond denominated in pesos will yield 9.645% without the hedge and 2.86% with the interest rate and exchange rate hedges. The structured feature of the bond helps in lowering the cost of financing.

TOPICS: Project finance, other real assets, legal/regulatory/public policy, emerging