An overview of project finance binomial loan valuation
Setting project financing parameters, such as the loan to valuation ratio, loan interest rate, repayment schedules, and fees, requires detailed modelling of the resulting credit risk in a non-recourse setting. Structured credit risk models, based on the early work of Merton, have been developed in continuous time which can assist with project financing structuring. These models require a level of mathematical sophistication that may not always be available to those undertaking project financing analysis. This note provides an overview of a discrete time binomial approach to structural credit risk modelling, which enables project financing analysts a more accessible tool to evaluate project loan structures.
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