Pricing of project finance bonds: a comparative analysis of primary market spreads

Sebastião S. Guedes; João M. Pinto

doi:10.1016/j.jcorpfin.2023.102429

Pricing of project finance bonds: a comparative analysis of primary market spreads

Sebastião S. Guedes, João M. Pinto

Research output: Contribution to journal › Article › peer-review

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Abstract

This paper provides a comparative analysis of project finance (PF) and traditional corporate finance (CF) bond spreads and pricing. Using a cross-section of 47,196 bonds issued worldwide in the 1993–2020 period, we show that PF and CF bonds are differently priced, PF bonds have higher spreads than comparable CF bonds, and although ratings are the most important pricing determinant for PF and CF bonds at issuance, investors rely on other contractual, macroeconomic, and firms' characteristics beyond these ratings. Our results do not support the hypothesis of PF transactions as mechanisms of reducing sponsoring firms' funding costs: the cost of borrowing affects financing choices and PF transactions' weighted average spread is higher than that of comparable CF bond deals. We also find that economies of scale, risk management, and information asymmetry arguments affect sponsoring firms' choice between PF and CF transactions.

Original language	English
Article number	102429
Number of pages	60
Journal	Journal of Corporate Finance
Volume	82
DOIs	https://doi.org/10.1016/j.jcorpfin.2023.102429
Publication status	Published - Oct 2023

Keywords

Bond pricing
Project finance
Corporate bonds
Cost of borrowing
Debt choice

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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10.1016/j.jcorpfin.2023.102429Licence: CC BY

70390897Final published version, 781 KBLicence: CC BY

http://hdl.handle.net/10400.14/41309Licence: CC BY

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@article{b327db917bda4de5b511a0c69b8388dd,

title = "Pricing of project finance bonds: a comparative analysis of primary market spreads",

abstract = "This paper provides a comparative analysis of project finance (PF) and traditional corporate finance (CF) bond spreads and pricing. Using a cross-section of 47,196 bonds issued worldwide in the 1993–2020 period, we show that PF and CF bonds are differently priced, PF bonds have higher spreads than comparable CF bonds, and although ratings are the most important pricing determinant for PF and CF bonds at issuance, investors rely on other contractual, macroeconomic, and firms' characteristics beyond these ratings. Our results do not support the hypothesis of PF transactions as mechanisms of reducing sponsoring firms' funding costs: the cost of borrowing affects financing choices and PF transactions' weighted average spread is higher than that of comparable CF bond deals. We also find that economies of scale, risk management, and information asymmetry arguments affect sponsoring firms' choice between PF and CF transactions.",

keywords = "Bond pricing, Project finance, Corporate bonds, Cost of borrowing, Debt choice",

author = "Guedes, {Sebasti{\~a}o S.} and Pinto, {Jo{\~a}o M.}",

note = "Funding Information: The authors thank the editor (Simi Kedia), an anonymous referee, Carol Alexander, Paulo Alves, Miguel Ferreira, Kim Kaivanto, Ricardo Ribeiro, William Megginson, Danielle Santos, M{\'a}rio Santos, Anthony Saunders, and Tiago Teixeira for their helpful suggestions. We would also like to thank participants in the 11th Accounting and Finance Conference of the Catholic University of Portugal - Porto, the European Financial Management Association 2023 Annual Conference, and the 2023 Portuguese Finance Network International Conference for helpful comments on earlier drafts. Financial support from Funda{\c c}{\~a}o para a Ci{\^e}ncia e Tecnologia (through project UIDB/00731/2020) is gratefully acknowledged. Funding Information: The authors thank the editor (Simi Kedia), an anonymous referee, Carol Alexander, Paulo Alves, Miguel Ferreira, Kim Kaivanto, Ricardo Ribeiro, William Megginson, Danielle Santos, M{\'a}rio Santos, Anthony Saunders, and Tiago Teixeira for their helpful suggestions. We would also like to thank participants in the 11th Accounting and Finance Conference of the Catholic University of Portugal - Porto, the European Financial Management Association 2023 Annual Conference, and the 2023 Portuguese Finance Network International Conference for helpful comments on earlier drafts. Financial support from Funda{\c c}{\~a}o para a Ci{\^e}ncia e Tecnologia (through project UIDB/00731/2020 ) is gratefully acknowledged. Publisher Copyright: {\textcopyright} 2023 The Authors",

year = "2023",

month = oct,

doi = "10.1016/j.jcorpfin.2023.102429",

language = "English",

volume = "82",

journal = "Journal of Corporate Finance",

issn = "0929-1199",

publisher = "Elsevier B.V.",

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TY - JOUR

T1 - Pricing of project finance bonds

T2 - a comparative analysis of primary market spreads

AU - Guedes, Sebastião S.

AU - Pinto, João M.

N1 - Funding Information: The authors thank the editor (Simi Kedia), an anonymous referee, Carol Alexander, Paulo Alves, Miguel Ferreira, Kim Kaivanto, Ricardo Ribeiro, William Megginson, Danielle Santos, Mário Santos, Anthony Saunders, and Tiago Teixeira for their helpful suggestions. We would also like to thank participants in the 11th Accounting and Finance Conference of the Catholic University of Portugal - Porto, the European Financial Management Association 2023 Annual Conference, and the 2023 Portuguese Finance Network International Conference for helpful comments on earlier drafts. Financial support from Fundação para a Ciência e Tecnologia (through project UIDB/00731/2020) is gratefully acknowledged. Funding Information: The authors thank the editor (Simi Kedia), an anonymous referee, Carol Alexander, Paulo Alves, Miguel Ferreira, Kim Kaivanto, Ricardo Ribeiro, William Megginson, Danielle Santos, Mário Santos, Anthony Saunders, and Tiago Teixeira for their helpful suggestions. We would also like to thank participants in the 11th Accounting and Finance Conference of the Catholic University of Portugal - Porto, the European Financial Management Association 2023 Annual Conference, and the 2023 Portuguese Finance Network International Conference for helpful comments on earlier drafts. Financial support from Fundação para a Ciência e Tecnologia (through project UIDB/00731/2020 ) is gratefully acknowledged. Publisher Copyright: © 2023 The Authors

PY - 2023/10

Y1 - 2023/10

N2 - This paper provides a comparative analysis of project finance (PF) and traditional corporate finance (CF) bond spreads and pricing. Using a cross-section of 47,196 bonds issued worldwide in the 1993–2020 period, we show that PF and CF bonds are differently priced, PF bonds have higher spreads than comparable CF bonds, and although ratings are the most important pricing determinant for PF and CF bonds at issuance, investors rely on other contractual, macroeconomic, and firms' characteristics beyond these ratings. Our results do not support the hypothesis of PF transactions as mechanisms of reducing sponsoring firms' funding costs: the cost of borrowing affects financing choices and PF transactions' weighted average spread is higher than that of comparable CF bond deals. We also find that economies of scale, risk management, and information asymmetry arguments affect sponsoring firms' choice between PF and CF transactions.

AB - This paper provides a comparative analysis of project finance (PF) and traditional corporate finance (CF) bond spreads and pricing. Using a cross-section of 47,196 bonds issued worldwide in the 1993–2020 period, we show that PF and CF bonds are differently priced, PF bonds have higher spreads than comparable CF bonds, and although ratings are the most important pricing determinant for PF and CF bonds at issuance, investors rely on other contractual, macroeconomic, and firms' characteristics beyond these ratings. Our results do not support the hypothesis of PF transactions as mechanisms of reducing sponsoring firms' funding costs: the cost of borrowing affects financing choices and PF transactions' weighted average spread is higher than that of comparable CF bond deals. We also find that economies of scale, risk management, and information asymmetry arguments affect sponsoring firms' choice between PF and CF transactions.

KW - Bond pricing

KW - Project finance

KW - Corporate bonds

KW - Cost of borrowing

KW - Debt choice

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U2 - 10.1016/j.jcorpfin.2023.102429

DO - 10.1016/j.jcorpfin.2023.102429

M3 - Article

SN - 0929-1199

VL - 82

JO - Journal of Corporate Finance

JF - Journal of Corporate Finance

M1 - 102429

ER -

Pricing of project finance bonds: a comparative analysis of primary market spreads

Abstract

Keywords

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CEGE: Research Center in Management and Economics

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Pricing of project finance bonds: a comparative analysis of primary market spreads

Abstract

Keywords

UN SDGs

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CEGE: Research Center in Management and Economics

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