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Risk Shifting through Nonfinancial Contracts: Effects on Loan Spreads and Capital Structure of Project Finance Deals


  • The authors thank Frederic Blanc-Brude, Ben Esty, Blaise Gadanecz, Robert Hauswald, Stefanie Kleimeier, Josh Lerner, Yijia Liu, Deborah Lucas (the editor), William L. Megginson, Marco Percoco, Reuben Segara, Andrea Sironi, Timo Valila, and two anonymous referees. Earlier versions of this paper were presented at SDA Bocconi Research Division Seminars, EFMA 2006 Annual Conference, Madrid, Università Bocconi Mega Projects and Regional Development International Workshop, Milan 2007, 8th International Business Research Conference–World Business Institute, Dubai 2008, the Australasian Finance and Banking Conference, Sydney, 2008, the FMA Annual Conference, Reno, 2009. We thank all the participants and discussants for helpful comments and suggestions. We also thank Daniele Corbino, Rita Delogu, and Alberto Sosso for their excellent research assistance. The responsibility for the contents of this work rests exclusively with the authors.


We study capital structure negotiation and cost of debt financing between sponsors and lenders using a sample of more than 1,000 project finance loans worth around US$195 billion closed between 1998 and 2003. We find that lenders: (i) rely on the network of nonfinancial contracts as a mechanism to control agency costs and project risks, (ii) are reluctant to price credit more cheaply if sponsors are involved as project counterparties in the relevant contracts, and finally (iii) do not appreciate sponsor involvement as a contractual counterparty of the special purpose vehicle when determining the level of leverage.

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