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Offtaking agreements and how they impact the cost of funding for project finance deals
Author(s) -
Bonetti Veronica,
Caselli Stefano,
Gatti Stefano
Publication year - 2010
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2009.11.002
Subject(s) - counterparty , credit risk , volatility (finance) , bond , business , economics , actuarial science , finance
Abstract Offtaking agreements are an important risk transfer mechanism in project finance. However, they can also be thought of as a trade‐off between lower market and higher counterparty risks. We use the case of the Quezon Power Ltd Co. to test the effect of higher counterparty risk on the cost of funding. Results indicate that the spread of Quezon's bond and counterparty risk are positively correlated when risk is represented by the daily volatility of the offtaker's stock returns. We also find an inverse relation between the rating upgrades of the offtaker and the spread paid by Quezon Power.