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

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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.

Keywords: F34; G21; G32; K12; capital structure; contractual arrangements; loan pricing; long-term contracts; project finance

Document Type: Research Article


Affiliations: 1: Francesco Corielliis an Associate Professor of Statistical Methods at the Università Bocconi. (: )., Email: 2: Stefano Gattiis an Associate Professor of Banking and Finance at the Università Bocconi (: )., Email: 3: Alessandro Steffanoniis Head of Structured Finance, Meliorbanca. (: )., Email:

Publication date: 2010-10-01

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