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

10 Citations (Scopus)

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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
Event	2023 European Financial Managemet Association Annual Conference - Cardiff Business School, Cardiff, United Kingdom Duration: 28 Jun 2023 → 1 Jul 2023 https://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2023-UK/2023%20meetings.php

UN SDGs

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

SDG 9 Industry, Innovation, and Infrastructure

Keywords

Bond pricing
Project finance
Corporate bonds
Cost of borrowing
Debt choice

Access to Document

10.1016/j.jcorpfin.2023.102429Licence: CC BY

70390897Final published version, 781 KBLicence: CC BY

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

Cite this

@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 = "Publisher Copyright: {\textcopyright} 2023 The Authors; 2023 European Financial Managemet Association Annual Conference, 2023 EFMA conference ; Conference date: 28-06-2023 Through 01-07-2023",

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.",

url = "https://www.efmaefm.org/0EFMAMEETINGS/EFMA\%20ANNUAL\%20MEETINGS/2023-UK/2023\%20meetings.php",

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TY - JOUR

T1 - Pricing of project finance bonds

T2 - 2023 European Financial Managemet Association Annual Conference

AU - Guedes, Sebastião S.

AU - Pinto, João M.

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

UR - https://www.scopus.com/pages/publications/85161342337

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

Y2 - 28 June 2023 through 1 July 2023

ER -

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

Abstract

UN SDGs

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

UN SDGs

Keywords

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CEGE: Research Center in Management and Economics

Cite this