The term structure of credit spreads in project finance Supplementary material for this article can be found at http:||www.interscience.wiley.com|jpages|1076-9307|suppmat|ijfe.350.html
Marco Sorge and
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Marco Sorge: The World Bank, USA, Postal: The World Bank, USA
Blaise Gadanecz: Bank for International Settlements, Switzerland, Postal: Bank for International Settlements, Switzerland
International Journal of Finance & Economics, 2008, vol. 13, issue 1, 68-81
This paper finds that the term structure of credit spreads in project finance is hump-shaped. This contrasts with other types of debt, where credit risk is shown instead to increase monotonically with maturity ceteris paribus. We emphasize a number of peculiar features of project finance structures that might underlie this finding, such as high leverage decreasing over time, long-term political risk guarantees and the sequential resolution of uncertainty along project advancement stages. Our result is particularly relevant given the importance of project finance as a source of long-term capital for infrastructure especially in developing countries and has implications for risk management in the framework of Basel II. Copyright © 2007 John Wiley & Sons, Ltd.
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