Effects of maturity choices on loan‐guarantee portfolios1

Michel Gendron, Van Son Lai and Issouf Soumaré

Journal of Risk Finance, 2006, vol. 7, issue 3, 237-254

Abstract: Purpose - The purpose of this paper is to analyse the effects of the maturities of credit‐enhanced debt contracts on the value of an insurer's loan‐guarantee portfolios. Design/methodology/approach - The paper proposes a contingent‐claims model and uses as measure of credit insurance risk, the market value of the private guarantee, which accounts for projects' and guarantor's specific risks, correlations as well as financial leverage. Findings - The results indicate that in the case of insuring the debts of two parallel projects with different specific risks, one high‐risk and the other low‐risk, the tradeoff between maturities of the guarantees increases with the projects' expected losses, hence the maturity choice decision is crucial for portfolios subject to high expected losses. For a two sequential projects loan‐guarantee portfolio, the paper finds that, regardless of the order of execution of the projects, it is the maturity of the debt supporting the high‐risk project that drives the risk exposure of the portfolio. Practical implications - Since the management of portfolios of guarantees is of significant importance to many organizations both domestically and internationally, this paper proposes a simple and tractable model to gauge the impact of maturity choices for loan‐guarantee portfolios. Originality/value - This is a first attempt at modeling multiple maturities in the context of portfolios of vulnerable loan guarantees.

Keywords: Credit; Project finance; Portfolio investment; Debts (search for similar items in EconPapers)
Date: 2006
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:jrfpps:15265940610664933

DOI: 10.1108/15265940610664933

Access Statistics for this article

Journal of Risk Finance is currently edited by Nawazish Mirza

More articles in Journal of Risk Finance from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().