M. Sorge and B. Gadanecz (Switzerland)
Project finance, term structure of credit spreads, political risk, capital requirements.
This paper performs an econometric analysis of the term structure of credit spreads in the international loan and bond markets and finds that in project finance longer maturity loans are not necessarily perceived by lenders as being riskier than shorter-term credits. This contrasts with other types of debt, where credit risk is found instead to increase with maturity ceteris paribus. We emphasize a number of peculiar features of project finance structures that might underlie this finding, such as high leverage, non-recourse debt, long-term political risk guarantees and the timing of project cash flows. We also draw some policy implications. In particular, our results indicate that a linear maturity adjustment to regulatory capital with slope inversely related to the probability of default (as in the Basel II IRB approach) might not be applicable to project finance exposures.
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