Loan Pricing in Project Finance
Posted: 3 Sep 1999
Date Written: November 1994
This paper compares the pricing of traditional, on-balance- sheet loans (TL) with a corresponding sample of project finance loans (PFL), where project finance is defined as "limited or non-recourse financing of a newly to be developed project through the establishment of a vehicle company." We study 123 PFLs and 207 TLs announced between 1979 and 1993 that were designed to finance an identifiable project. This study makes three principal contributions. First, we document that the pricing factors are the same for TL and PFL, suggesting that both types of loans are priced in a single market--rather than in segmented markets. Second, as predicted by the limited recourse nature of PF lending, we find that PFL have, on average, higher loan rates than TL. Finally, we document that loan prices (rates) are significantly positively related to loan maturity and project country risk, and negatively related to the degree of output price risk and the presence of a project sponsor loan guarantee.
JEL Classification: F34, G15, G21, G32
Suggested Citation: Suggested Citation