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Offtaking agreements and how they impact the cost of funding for project finance deals: A clinical case study of the Quezon Power Ltd Co

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  • Bonetti, Veronica
  • Caselli, Stefano
  • Gatti, Stefano
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    Abstract

    Offtaking agreements are an important risk transfer mechanism in project finance. However, they can also be thought of as a trade-off between lower market and higher counterparty risks. We use the case of the Quezon Power Ltd Co. to test the effect of higher counterparty risk on the cost of funding. Results indicate that the spread of Quezon's bond and counterparty risk are positively correlated when risk is represented by the daily volatility of the offtaker's stock returns. We also find an inverse relation between the rating upgrades of the offtaker and the spread paid by Quezon Power.

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    Bibliographic Info

    Article provided by Elsevier in its journal Review of Financial Economics.

    Volume (Year): 19 (2010)
    Issue (Month): 2 (April)
    Pages: 60-71

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    Handle: RePEc:eee:revfin:v:19:y:2010:i:2:p:60-71

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    Web page: http://www.elsevier.com/locate/inca/620170

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    Keywords: Risk analysis Counterparty risk Project finance;

    References

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    1. Shah, Salman & Thakor, Anjan V., 1987. "Optimal capital structure and project financing," Journal of Economic Theory, Elsevier, vol. 42(2), pages 209-243, August.
    2. Yener Altunbas & Blaise Gadanecz, 2004. "Developing Country Economic Structure and the Pricing of Syndicated Credits," Journal of Development Studies, Taylor & Francis Journals, vol. 40(5), pages 143-173.
    3. Stefanie Kleimeier & William L. Megginson, 2000. "Are Project Finance Loans Different From Other Syndicated Credits?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 13(1), pages 75-87.
    4. Benjamin C. Esty, 2004. "Why Study Large Projects? An Introduction to Research on Project Finance," European Financial Management, European Financial Management Association, vol. 10(2), pages 213-224.
    5. Dailami, Mansoor & Hauswald, Robert, 2007. "Credit-spread determinants and interlocking contracts: A study of the Ras Gas project," Journal of Financial Economics, Elsevier, vol. 86(1), pages 248-278, October.
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    7. Richard A. Brealey & Ian A. Cooper & Michel A. Habib, 1996. "Using Project Finance To Fund Infrastructure Investments," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(3), pages 25-39.
    8. Holthausen, Robert W. & Leftwich, Richard W., 1986. "The effect of bond rating changes on common stock prices," Journal of Financial Economics, Elsevier, vol. 17(1), pages 57-89, September.
    9. Esty, Benjamin C. & Megginson, William L., 2003. "Creditor Rights, Enforcement, and Debt Ownership Structure: Evidence from the Global Syndicated Loan Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(01), pages 37-60, March.
    10. Stefano Gatti & Alvaro Rigamonti & Francesco Saita & Mauro Senati, 2007. "Measuring Value-at-Risk in Project Finance Transactions," European Financial Management, European Financial Management Association, vol. 13(1), pages 135-158.
    11. Hand, John R M & Holthausen, Robert W & Leftwich, Richard W, 1992. " The Effect of Bond Rating Agency Announcements on Bond and Stock Prices," Journal of Finance, American Finance Association, vol. 47(2), pages 733-52, June.
    12. Dailami, Mansoor & Hauswald, Robert, 2003. "The emerging project bond market - covenant provisions and credit spreads," Policy Research Working Paper Series 3095, The World Bank.
    13. Benjamin C. Esty, 2001. "Structuring Loan Syndicates: A Case Study Of The Hong Kong Disneyland Project Loan," Journal of Applied Corporate Finance, Morgan Stanley, vol. 14(3), pages 80-95.
    14. Hainz, Christa & Kleimeier, Stefanie, 2006. "Project Finance as a Risk-Management Tool in International Syndicated Lending," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 183, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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    Cited by:
    1. Megginson, William L., 2010. "Introduction to the special issue on project finance," Review of Financial Economics, Elsevier, vol. 19(2), pages 47-48, April.
    2. João Pinto, 2014. "What is Project Finance?," Working Papers de Economia (Economics Working Papers) 01, Faculdade de Economia e Gestão, Universidade Católica Portuguesa (Porto).

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