What is project finance?
-
DOIhttp://dx.doi.org/10.21511/imfi.14(1-1).2017.06
-
Article InfoVolume 14 2017, Issue #1 (cont.), pp. 200-210
- Cited by
- 3579 Views
-
2659 Downloads
This work is licensed under a
Creative Commons Attribution-NonCommercial 4.0 International License
Project finance is the process of financing a specific economic unit that the sponsors create, in which creditors share much of the venture’s business risk and funding is obtained strictly for the project itself. Project finance creates value by reducing the costs of funding, maintaining the sponsors financial flexibility, increasing the leverage ratios, avoiding contamination risk, reducing corporate taxes, improving risk management, and reducing the costs associated with market imperfections. However, project finance transactions are complex undertakings, they have higher costs of borrowing when compared to conventional financing and the negotiation of the financing and operating agreements is time-consuming. In addition to describing the economic motivation for the use of project finance, this paper provides details on project finance characteristics and players, presents the recent trends of the project finance market and provides some statistics in relation to project finance lending activity between 2000 and 2014. Statistical analysis shows that project finance loans arranged for U.S. borrowers have higher credit spreads and upfront fees, and have higher loan size to deal size ratios when compared with loans arranged for borrowers located in W.E. On the contrary, loans closed in the U.S. have a much shorter average maturity and are much less likely to be subject to currency risk and to be closed as term loans.
- Keywords
-
JEL Classification (Paper profile tab)G24, G32
-
References27
-
Tables4
-
Figures1
-
- Fig. 1. Typical structure of a project finance deal
-
- Table 1. Distribution of the sample of PF deals by year
- Table 2. Industrial distribution of the sample of PF deals
- Table 3. Geographic distribution of the sample of PF deals
- Table 4. Contractual characteristics of the sample of PF loans
-
- Allen, F., and D. Gale. (1999). Comparing Financial Systems. MIT Press, Cambridge, MA.
- Beale, C., M. Chatain, N. Fox, S. Bell, J. Berner, R. Preminger, and J. Prins. (2002). Credit Attributes of Project Finance. The Journal of Structured and Project Finance, 8(3), 5-9.
- BIS. (2001). Working Paper on the Internal Ratings-Based Approach to Specialised Lending Exposures. BCBS Working Papers No 9, Bank of International Settlements.
- Blanc-Brude, F., and R. Strange. (2007). How banks price loans to public private partnerships: Evidence from the European markets. Journal of Applied Corporate Finance, 19, 94-106.
- Bonetti, V., S. Caselli, and S. Gatti. (2010). Offtaking agreements and how they impact the cost of funding for project finance deals: A clinical case study of the Quezon Power Ltd Co. Review of Financial Economics, 19, 60-71.
- Brealey, R., I. Cooper, and M. Habib. (1996). Using project finance to fund infrastructure investments, Journal of Applied Corporate Finance, 9, 25-38.
- Buscaino, V., S. Caselli, F. Corielli, and S. Gatti. (2012). Project finance collateralised debt obligations: An empirical analysis of spread determinants. European Financial Management, 18, 950-969.
- Carey, M., and G. Nini. (2007). Is the corporate loan market globally integrated? A pricing puzzle. Journal of Finance, 62, 2969-3007.
- Caselli, S., and S. Gatti. (2005). Structured Finance: Techniques, Products and Market. Springer: Berlin.
- Chakraborty, S., and T. Ray. (2006). Bank-based versus market-based financial systems: A growth-theoretic analysis. Journal of Monetary Economics, 53, 329-350.
- Corielli, F., S. Gatti, and A. Steffanoni. (2010). Risk Shifting through Nonfinancial Contracts: Effects on Loan Spreads and Capital Structure of Project Finance Deals. Journal of Money, Credit and Banking, 42, 1295-1320.
- Demirgüç-Kunt, A., and R. Levine. (1999). Financial structures across countries: stylized facts. Mimeograph, World Bank, Washington, DC.
- Esty, Benjamin. (2003). The Economic Motivations for Using Project Finance. Boston: Harvard Business School publishing.
- Esty, Benjamin. (2004a). Modern Project Finance – A Casebook. John Wiley & Sons, Inc.
- Esty, Benjamin. (2004b). Why Study Large Projects? An Introduction to Research on Project Finance. European Financial Management, 10, 213-224.
- Esty, B., and A. Sesia. (2007). An Overview of Project Finance & Infrastructure Finance – 2006 Update. Boston: Harvard Business School publishing.
- Esty, B., and W. Megginson. (2003). Creditor rights, enforcement, and debt ownership structure: Evidence from the global syndicated loan market. Journal of Financial and Quantitative Analysis, 38, 37-59.
- Fabozzi, F., H. Davis, and M. Choudhry. (2006). Introduction to Structured Finance. Wiley Finance.
- Foley, C., and R. Greenwood. (2010). The evolution of corporate ownership after IPO: the impact of investor protection. The Review of Financial Studies, 23, 1231-1260.
- Gatti, Stefano. (2008). Project Finance in Theory and Practice – Designing, Structuring, and Financing Private and Public Projects. Academic Press Advanced Finance Series.
- Gatti, S., S. Kleimeier, W. Megginson, and A. Steffanoni. (2013). Arranger Certification in Project Finance. Financial Management, 42, 1-40.
- Kleimeier, S., and W. Megginson. (2000). Are project finance loans different from other syndicated credits? Journal of Applied Corporate Finance, 13, 75-87.
- Klompjan, R., and M. Wouters. (2002). Default risk in project finance. Journal of Structured and Project Finance, 8, 10-21.
- Nevitt, P., and F. Fabozzi. (2001). Project Financing. London: Euromoney, 7th Edition.
- Pinto, J., and P. Alves. (2016). Project finance in Europe: An overview and discussion of key drivers. EIB Working Papers, No. 2016/04.
- Sorge, M., and B. Gadanecz. (2008). The term structure of credit spreads in project finance. International Journal of Finance and Economics, 13, 68-81.
- Standard & Poor’s. (2004). When Projects Fail: Ten Years of Project Finance Ratings. Global Project Finance Yearbook, London: Standard & Poor’s.