Contract Risks and Credit Spread Determinants in the International Project Bond Market

Dailami, Mansoor ; Hauswald, Robert

World Bank, Washington, DC

关键词: ACCOUNTING;    ASSETS;    BALANCE SHEET;    BANK LENDING;    BANK LOANS;   

DOI  :  10.1596/1813-9450-2712
RP-ID  :  WPS2712

学科分类：社会科学、人文和艺术（综合）

来源: World Bank Open Knowledge Repository

【 摘 要 】

International bond markets have becomean increasingly important source of long-term capital forinfrastructure projects in emerging market economies overthe past decade. The Ras Laffan Liquified Natural Gas (RasGas) project represents a milestone in this respect: its$1.2 billion bond offering, completed in December 1996, hasbeen the largest for any international project. The Ras Gasproject has the right to extract, process, and sellliquefied natural gas (LNG) from a field off the shore ofQatar. The principal off-taker is the Korea Gas Corporation(Kogas), which resells most of the LNG to the Korea ElectricPower Corporation (Kepco) for electricity generation. Inthis clinical study the authors analyze the determinants ofcredit spreads for the Ras Gas project in terms of itscontractual structure, with a view to better understandingthe role of contract design in facilitating access to theglobal project bond market. Market risk perceptions havelong been recognized to be a function of firm-specificvariables, particularly asset value as embodied incontracts. The authors therefore study the impact of threeinterlocking contracts on the credit spreads of theproject's actively traded global bonds: the 25-yearoutput sales and purchase agreement with Kogas-Kepco, theinternational bond covenant, and an output price-contingentdebt service guarantee by Mobil to debt holders. Using asample of daily data from January 1997 to March 2000, theauthors find that the quality of the off-taker'scredit-and, more important, the market's assessment ofthe off-taker's economic prospects-drive project bondcredit spreads and pricing. In addition, seemingly unrelatedevents in emerging debt markets spill over to project bondmarkets and affect risk perceptions and prices in thissegment. Judicious use of an output price-contingent debtservice guarantee by shareholders can significantly reduceproject risks, and markets reward issuers through tightercredit spreads. Bondholders and shareholders share residualrisks over time, despite covenants meant to preempt riskshifting. This type of risk shifting originates fromincomplete contracts and the nonrecourse nature of projectfinance. It does not necessarily result from a deliberateattempt by management to increase shareholder value at theexpense of debt holders by pursuing high-risk, low-valueactivities, although project managers and shareholders couldstill exploit their informational advantages by leavingoutput supply contracts incomplete in ways beneficial totheir private interests. The results hold important lessonsfor global project finance. Projects incorporating certaindesign features can reap significant financial gains throughlower borrowing costs and longer debt maturities: Judiciousguarantees by parents that enjoy a particular hedgingadvantage enhance a project's appeal, as reflected infavorable pricing. Pledging receivables rather than physicalassets as collateral and administering investor cash flowsthrough an off-shore account offers additional security todebt holders. Projects should use their liability structureto create an implicit option on future private debtfinancing that matches the real option of a projectexpansion. The finding that bondholders bear residual risksmeans that shareholders can reduce their risks arising frombilateral monopolies and buy insurance against unforeseenand unforeseeable events.