Risk Management with Leverage: Evidence from Project Finance

Byoun, Soku; Kim, Jaemin; Yoo, Sean Sehyun

doi:10.2139/ssrn.1790378

Cited by 6 publications

(4 citation statements)

References 42 publications

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“…This should be expected given the role of MDBs to push into areas where the private sector would not operate. The theme of the trade-offs between leverage, contracts and MDBs is explored by Byoun, Kim, and Yoo (2013) using a data set from Thomson Financial Securities Data Corporation for the period 1997-2006. It incorporates 2,572 PF deals across 124 countries so there is diversity of country risk and industry risk.…”

Section: The Financing Structure Of Development Projectsmentioning

confidence: 99%

“…This links back to questions discussed in subsection 5.2 about when and why an MDB might be involved in a transaction, and what motivates the private sector to participate. Analysis focusing on MDBs involvement is useful to build a view on how development finance is operating (Byoun et al, 2013;Byoun & Xu, 2014;Hainz & Kleimeier, 2012;Sorge & Gadanecz, 2008), although that does not explain why the private sector would be motivated to co-invest.…”

Section: The Composition Of Lending Syndicatesmentioning

confidence: 99%

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Mobilising Private Funding of Development Finance

McHugh

2021

The Journal of Development Studies

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Successful delivery of the United Nations Sustainable Development Goals (SDGs) is dependent upon mobilising private sector finance. From a lending perspective, this requires banks to co-invest or otherwise divert more resources to development finance. To provide insights into the effectiveness of this important initiative, this paper reviews key literature across Scopus, Web of Science and Google Scholar using a defined set of keyword searches. Four main themes of future research are identified. First, the international political economy has an influence on the competitive conditions in development finance and these forces need to be explained. Second, the structure of development projects affects the extent to which private sector capital is willing to be mobilised. More insights are needed into how private sector banks can be influenced. Third, the manner in which development banks participate in development projects affects the availability of credit. A greater understanding of their role could unlock greater financing flows. Finally, it is shown that risk appetite and mitigation of development finance affects pricing and credit availability which is another critical component of delivering the SDGs.

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Section: The Financing Structure Of Development Projectsmentioning

confidence: 99%

Section: The Composition Of Lending Syndicatesmentioning

confidence: 99%

Mobilising Private Funding of Development Finance

McHugh

2021

The Journal of Development Studies

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“…It is important to mention that in the segment of “property” 60 per cent of project loans have a leverage rate higher than 80 per cent, with a mean of 80 per cent. Byoun et al (2013) report even much higher leverage ratios for the period of 1997-2006 examining more than 2,500 projects. In their project characteristic statistics, broken down by industries, they report an average leverage of 89 per cent, and on more than 90 per cent by the two dominant sectors of utilities and constructions.…”

Section: Parameter Setting – Empirics Reference Pointsmentioning

confidence: 99%

Risk-adjusted pricing of project loans

Walter

2019

SEF

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Purpose The purpose of this paper is to assess whether project finance loans were properly priced based on their risk before the crisis of 2008-2009 and what lessons can be learned under different market circumstances. Design/methodology/approach A literature review presents the structure of project financing, how banks are inspired to apply risk-adjusted price calculations for loans to create value for shareholders and how risk measurement differs by project loans. The authors adapt a general model for risk-adjusted pricing to project loans. Based on empirical parameters, assuming different margins and leverages, the authors estimate the implied maximum probability of default of projects, where project loans could produce value added to lenders. The authors compare these maximum probabilities of default with reference points. Findings The authors conclude that by the years of 2006-2007 several projects were very unlikely to produce any value added for shareholders and did not reach the minimum margin. Market and regulatory circumstances of 2016-2017 have significantly increased required margin levels and must shift lenders to a more conservative pricing and leverage policy. Research limitations/implications Though the presented model is general, the simulation focusses on the European banking market. Practical implications In high market competition, banks tend to underestimate risk, underprice loans and loosen risk parameters. The crisis pushed banks back to a more conservative approach, however, the danger to return to a loosen project loan policy is real. The simulation shows how required prices are influenced by different market circumstances. Originality/value The paper adapts the risk-adjusted pricing methodology of standard loans to a new segment of project financing and gives an insight into the risk-pricing characteristics of project loans. The authors can draw down several valuable conclusions what how the market environment or project phases affect risk-adjusted pricing and the ability to produce value added to shareholders.

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“…The underlying considerations for the free cash flow theory are based on the agency theory (Jensen and Meckling 1976) with firm managers as agents and shareholders as 5 This section outlines theoretical considerations regarding the capital structure and does not consider recent empirical studies on project financing (for example, Harford et al 2009;Uysal 2011;Byoun et al 2013;Elsas et al 2014). For an overview of traditional capital structure theories, see also Harris and Raviv (1991).…”

Section: Financing Decision Of a Companymentioning

confidence: 99%

Challenging the payment effect in bank-financed takeovers

Fischer

2015

J Manag Control

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In the context of bank-financed takeovers, I examine the influence of loans and their characteristics on the success of acquisitions. The unique setting of matched syndicated loans allows me to forego the regular assumption in academic literature of cash payment being equal to debt financing. Consequently, I am able to distinguish between the payment effect and the financing effect of an acquisition. My three main findings are: (i) Payment method is just an estimator of the debt proportion in takeovers. Although percentage of cash has significant explanatory power to account for the sources of financing, variation still remains. (ii) Controlling for the real financial structure renders the payment method insignificant. Hence, the well-known outperformance of cash payment around the announcement of a takeover might actually just be an outperformance of debt-financed takeovers. (iii) Bank-financed acquisitions are associated, on average, with positive abnormal returns for acquirers' stockholders. Higher bank involvements-approximated by greater deal leverage, higher loan costs, longer maturity, lower interest coverage, or no previous banking relationship-are signals for a more successful takeover.

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Risk Management with Leverage: Evidence from Project Finance

Cited by 6 publications

References 42 publications

Mobilising Private Funding of Development Finance

Mobilising Private Funding of Development Finance

Risk-adjusted pricing of project loans

Challenging the payment effect in bank-financed takeovers

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