Contract Risks and Credit Spread Determinants in the International Project Bond Market
International bond markets have become an increasingly important source of long-term capital for infrastructure projects in emerging market economies over the past decade. The Ras Laffan Liquified Natural Gas (Ras Gas) project represents a mileston...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
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World Bank, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2001/11/1631789/contract-risks-credit-spread-determinants-international-project-bond-market http://hdl.handle.net/10986/19496 |
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okr-10986-19496 |
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oai_dc |
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Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
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World Bank Open Knowledge Repository |
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World Bank |
| language |
English en_US |
| topic |
ACCOUNTING ASSETS BALANCE SHEET BANK LENDING BANK LOANS BONDS BORROWING BORROWING COSTS CAPITAL INVESTMENT CAPITAL MARKET CAPITAL MARKETS CASH FLOW CASH FLOWS COMMERCIAL BANKS CONSTRUCTION CONTAGION CONTRACTUAL ARRANGEMENTS CORPORATE FINANCE CORPORATE GOVERNANCE CREDIT LINE CREDIT QUALITY CREDIT RATING CREDITOR DEBT DEBT COVENANTS DEBT FINANCING DEBT SECURITY DEFAULT RISK DIVIDENDS ECONOMIC CIRCUMSTANCES ECONOMICS ECONOMIES OF SCALE ELECTRICITY DEMAND ELECTRICITY GENERATION EMERGING MARKET ECONOMIES EMPIRICAL ANALYSIS EMPIRICAL EVIDENCE EMPIRICAL INVESTIGATIONS EMPIRICAL STUDIES EXOGENOUS VARIABLES FINANCIAL CONTRACTS FINANCIAL CRISIS FINANCIAL TRANSACTIONS FORECASTS FUTURE VALUE IMPORTS INSURANCE LIENS LIQUIDITY MARKET RISK MATURITIES MONOPOLIES MONOPOLY MORAL HAZARD OFFERINGS OIL OIL PRICES PRIVATIZATION PROJECT FINANCING PROPERTY RIGHTS PUBLIC DEBT RISK FACTORS RISK MANAGEMENT RISK MODEL RISK SHARING SHAREHOLDERS TOTAL COSTS VALUATION |
| spellingShingle |
ACCOUNTING ASSETS BALANCE SHEET BANK LENDING BANK LOANS BONDS BORROWING BORROWING COSTS CAPITAL INVESTMENT CAPITAL MARKET CAPITAL MARKETS CASH FLOW CASH FLOWS COMMERCIAL BANKS CONSTRUCTION CONTAGION CONTRACTUAL ARRANGEMENTS CORPORATE FINANCE CORPORATE GOVERNANCE CREDIT LINE CREDIT QUALITY CREDIT RATING CREDITOR DEBT DEBT COVENANTS DEBT FINANCING DEBT SECURITY DEFAULT RISK DIVIDENDS ECONOMIC CIRCUMSTANCES ECONOMICS ECONOMIES OF SCALE ELECTRICITY DEMAND ELECTRICITY GENERATION EMERGING MARKET ECONOMIES EMPIRICAL ANALYSIS EMPIRICAL EVIDENCE EMPIRICAL INVESTIGATIONS EMPIRICAL STUDIES EXOGENOUS VARIABLES FINANCIAL CONTRACTS FINANCIAL CRISIS FINANCIAL TRANSACTIONS FORECASTS FUTURE VALUE IMPORTS INSURANCE LIENS LIQUIDITY MARKET RISK MATURITIES MONOPOLIES MONOPOLY MORAL HAZARD OFFERINGS OIL OIL PRICES PRIVATIZATION PROJECT FINANCING PROPERTY RIGHTS PUBLIC DEBT RISK FACTORS RISK MANAGEMENT RISK MODEL RISK SHARING SHAREHOLDERS TOTAL COSTS VALUATION Dailami, Mansoor Hauswald, Robert Contract Risks and Credit Spread Determinants in the International Project Bond Market |
| relation |
Policy Research Working Paper;No. 2712 |
| description |
International bond markets have become
an increasingly important source of long-term capital for
infrastructure projects in emerging market economies over
the past decade. The Ras Laffan Liquified Natural Gas (Ras
Gas) project represents a milestone in this respect: its
$1.2 billion bond offering, completed in December 1996, has
been the largest for any international project. The Ras Gas
project has the right to extract, process, and sell
liquefied natural gas (LNG) from a field off the shore of
Qatar. The principal off-taker is the Korea Gas Corporation
(Kogas), which resells most of the LNG to the Korea Electric
Power Corporation (Kepco) for electricity generation. In
this clinical study the authors analyze the determinants of
credit spreads for the Ras Gas project in terms of its
contractual structure, with a view to better understanding
the role of contract design in facilitating access to the
global project bond market. Market risk perceptions have
long been recognized to be a function of firm-specific
variables, particularly asset value as embodied in
contracts. The authors therefore study the impact of three
interlocking contracts on the credit spreads of the
project's actively traded global bonds: the 25-year
output sales and purchase agreement with Kogas-Kepco, the
international bond covenant, and an output price-contingent
debt service guarantee by Mobil to debt holders. Using a
sample of daily data from January 1997 to March 2000, the
authors find that the quality of the off-taker's
credit-and, more important, the market's assessment of
the off-taker's economic prospects-drive project bond
credit spreads and pricing. In addition, seemingly unrelated
events in emerging debt markets spill over to project bond
markets and affect risk perceptions and prices in this
segment. Judicious use of an output price-contingent debt
service guarantee by shareholders can significantly reduce
project risks, and markets reward issuers through tighter
credit spreads. Bondholders and shareholders share residual
risks over time, despite covenants meant to preempt risk
shifting. This type of risk shifting originates from
incomplete contracts and the nonrecourse nature of project
finance. It does not necessarily result from a deliberate
attempt by management to increase shareholder value at the
expense of debt holders by pursuing high-risk, low-value
activities, although project managers and shareholders could
still exploit their informational advantages by leaving
output supply contracts incomplete in ways beneficial to
their private interests. The results hold important lessons
for global project finance. Projects incorporating certain
design features can reap significant financial gains through
lower borrowing costs and longer debt maturities: Judicious
guarantees by parents that enjoy a particular hedging
advantage enhance a project's appeal, as reflected in
favorable pricing. Pledging receivables rather than physical
assets as collateral and administering investor cash flows
through an off-shore account offers additional security to
debt holders. Projects should use their liability structure
to create an implicit option on future private debt
financing that matches the real option of a project
expansion. The finding that bondholders bear residual risks
means that shareholders can reduce their risks arising from
bilateral monopolies and buy insurance against unforeseen
and unforeseeable events. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Dailami, Mansoor Hauswald, Robert |
| author_facet |
Dailami, Mansoor Hauswald, Robert |
| author_sort |
Dailami, Mansoor |
| title |
Contract Risks and Credit Spread Determinants in the International Project Bond Market |
| title_short |
Contract Risks and Credit Spread Determinants in the International Project Bond Market |
| title_full |
Contract Risks and Credit Spread Determinants in the International Project Bond Market |
| title_fullStr |
Contract Risks and Credit Spread Determinants in the International Project Bond Market |
| title_full_unstemmed |
Contract Risks and Credit Spread Determinants in the International Project Bond Market |
| title_sort |
contract risks and credit spread determinants in the international project bond market |
| publisher |
World Bank, Washington, DC |
| publishDate |
2014 |
| url |
http://documents.worldbank.org/curated/en/2001/11/1631789/contract-risks-credit-spread-determinants-international-project-bond-market http://hdl.handle.net/10986/19496 |
| _version_ |
1764439879691796480 |
| spelling |
okr-10986-194962021-04-23T14:03:43Z Contract Risks and Credit Spread Determinants in the International Project Bond Market Dailami, Mansoor Hauswald, Robert ACCOUNTING ASSETS BALANCE SHEET BANK LENDING BANK LOANS BONDS BORROWING BORROWING COSTS CAPITAL INVESTMENT CAPITAL MARKET CAPITAL MARKETS CASH FLOW CASH FLOWS COMMERCIAL BANKS CONSTRUCTION CONTAGION CONTRACTUAL ARRANGEMENTS CORPORATE FINANCE CORPORATE GOVERNANCE CREDIT LINE CREDIT QUALITY CREDIT RATING CREDITOR DEBT DEBT COVENANTS DEBT FINANCING DEBT SECURITY DEFAULT RISK DIVIDENDS ECONOMIC CIRCUMSTANCES ECONOMICS ECONOMIES OF SCALE ELECTRICITY DEMAND ELECTRICITY GENERATION EMERGING MARKET ECONOMIES EMPIRICAL ANALYSIS EMPIRICAL EVIDENCE EMPIRICAL INVESTIGATIONS EMPIRICAL STUDIES EXOGENOUS VARIABLES FINANCIAL CONTRACTS FINANCIAL CRISIS FINANCIAL TRANSACTIONS FORECASTS FUTURE VALUE IMPORTS INSURANCE LIENS LIQUIDITY MARKET RISK MATURITIES MONOPOLIES MONOPOLY MORAL HAZARD OFFERINGS OIL OIL PRICES PRIVATIZATION PROJECT FINANCING PROPERTY RIGHTS PUBLIC DEBT RISK FACTORS RISK MANAGEMENT RISK MODEL RISK SHARING SHAREHOLDERS TOTAL COSTS VALUATION International bond markets have become an increasingly important source of long-term capital for infrastructure projects in emerging market economies over the past decade. The Ras Laffan Liquified Natural Gas (Ras Gas) project represents a milestone in this respect: its $1.2 billion bond offering, completed in December 1996, has been the largest for any international project. The Ras Gas project has the right to extract, process, and sell liquefied natural gas (LNG) from a field off the shore of Qatar. The principal off-taker is the Korea Gas Corporation (Kogas), which resells most of the LNG to the Korea Electric Power Corporation (Kepco) for electricity generation. In this clinical study the authors analyze the determinants of credit spreads for the Ras Gas project in terms of its contractual structure, with a view to better understanding the role of contract design in facilitating access to the global project bond market. Market risk perceptions have long been recognized to be a function of firm-specific variables, particularly asset value as embodied in contracts. The authors therefore study the impact of three interlocking contracts on the credit spreads of the project's actively traded global bonds: the 25-year output sales and purchase agreement with Kogas-Kepco, the international bond covenant, and an output price-contingent debt service guarantee by Mobil to debt holders. Using a sample of daily data from January 1997 to March 2000, the authors find that the quality of the off-taker's credit-and, more important, the market's assessment of the off-taker's economic prospects-drive project bond credit spreads and pricing. In addition, seemingly unrelated events in emerging debt markets spill over to project bond markets and affect risk perceptions and prices in this segment. Judicious use of an output price-contingent debt service guarantee by shareholders can significantly reduce project risks, and markets reward issuers through tighter credit spreads. Bondholders and shareholders share residual risks over time, despite covenants meant to preempt risk shifting. This type of risk shifting originates from incomplete contracts and the nonrecourse nature of project finance. It does not necessarily result from a deliberate attempt by management to increase shareholder value at the expense of debt holders by pursuing high-risk, low-value activities, although project managers and shareholders could still exploit their informational advantages by leaving output supply contracts incomplete in ways beneficial to their private interests. The results hold important lessons for global project finance. Projects incorporating certain design features can reap significant financial gains through lower borrowing costs and longer debt maturities: Judicious guarantees by parents that enjoy a particular hedging advantage enhance a project's appeal, as reflected in favorable pricing. Pledging receivables rather than physical assets as collateral and administering investor cash flows through an off-shore account offers additional security to debt holders. Projects should use their liability structure to create an implicit option on future private debt financing that matches the real option of a project expansion. The finding that bondholders bear residual risks means that shareholders can reduce their risks arising from bilateral monopolies and buy insurance against unforeseen and unforeseeable events. 2014-08-20T17:57:26Z 2014-08-20T17:57:26Z 2001-11 http://documents.worldbank.org/curated/en/2001/11/1631789/contract-risks-credit-spread-determinants-international-project-bond-market http://hdl.handle.net/10986/19496 English en_US Policy Research Working Paper;No. 2712 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research |