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Risk Shifting through Nonfinancial Contracts: Effects on Loan Spreads and Capital Structure of Project Finance Deals
Author(s) -
CORIELLI FRANCESCO,
GATTI STEFANO,
STEFFAI ALESSANDRO
Publication year - 2010
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2010.00342.x
Subject(s) - counterparty , business , leverage (statistics) , capital structure , agency cost , finance , project finance , loan , debt , collateral , syndicated loan , credit risk , financial system , shareholder , corporate governance , machine learning , computer science
We study capital structure negotiation and cost of debt financing between sponsors and lenders using a sample of more than 1,000 project finance loans worth around US$195 billion closed between 1998 and 2003. We find that lenders: (i) rely on the network of nonfinancial contracts as a mechanism to control agency costs and project risks, (ii) are reluctant to price credit more cheaply if sponsors are involved as project counterparties in the relevant contracts, and finally (iii) do not appreciate sponsor involvement as a contractual counterparty of the special purpose vehicle when determining the level of leverage.