Are Project Finance Loans Different From Other Syndicated Credits?

This paper provides the first full‐length empirical analysis of project finance, which is defined as “limited or non‐recourse financing of a newly to be developed project through the establishment of a vehicle company.” The article compares the characteristics of a sample of 4,956 project finance loans (worth $634 billion) to comparable samples of non‐project finance loans, all of which are drawn from a comprehensive sample of 90,784 syndicated loans (worth $13.2 trillion) booked on international capital markets since 1980. The authors find that project finance (PF) loans differ significantly from non‐project finance loans in that PF loans have a longer average maturity, are more likely to have third‐party guarantees, and are far more likely to be extended to non‐U.S. borrowers and to borrowers in riskier countries. Project finance credits also involve more participating banks, have fewer loan covenants, are more likely to use fixed‐rate rather than floating‐rate loan pricing, and are more likely to be extended to borrowers in tangible‐asset‐rich industries, such as real estate and electric utilities. Despite being nonrecourse finance, floating‐rate project finance loans have lower credit spreads (over LIBOR) than do most comparable non‐PF loans. The authors also report that projects funded with PF loans are heavily leveraged, with an average loan to value ratio of 67%.