Reflexión

The thesis examines the determinants of PF loan terms, given its increasing use in the financing of long-term capital investments and infrastructure. The primary objectives are to (i) examine whether certification by domestic FIs impact the spread on PF loans (ii) assess whether sponsors participation as counterparties have an impact on the key loan terms (spread and leverage ratio), and (iii) whether country-level political and legal institutions simultaneously affect PF loans terms. These three objectives are addressed in Chapter 3, 4 and 5 respectively.

The use of PF in emerging and developing economies has increased in the last two decades. Accompanying this increase is the participation of domestic FI as lead arrangers (also known as certification). In Chapter 3, the study attempts to quantify the economic benefits of these certifications, using a sample of 1,270, PF syndicated loan tranches signed in 53 emerging economies, between 1998 and 2011. The study used an endogenous switching regression to control for the joint determination of certification and loan outcomes. The study first estimates the determinants of domestic FI certification and the loan spread. Second, the study uses the estimates of the determinants of certification and loan spread to derive the conditional and counterfactual loan spreads, with the difference interpreted as the impact of certification by domestic FI. The findings indicate that domestic FIs are more likely to certify loan do not have political risk guarantees, but less likely to certify if it an EXIM loan facility or signed in currencies other than the project countries. On the loan spread determinants, the study finds that EXIM facilities, transportation and commercial projects, and Latin America and South East Asia projects have higher spreads. The impact of certification by domestic FIs

on the loan spread is approximately 47 bps. The reduction in loan spread is highest for projects located in water and sewage, oil and gas, power and mining industry. Further, projects located in Indian Subcontinent, Latin America and lower-income countries also report higher impact for loans with certification by domestic FIs. From a policy perspective, the findings suggest some economic benefits for borrowers and other key stakeholders. More generally, the findings show that in an environment where asymmetric information is pervasive, lenders can use domestic institutions to overcome these challenges. The results also support on-going efforts to deepen financial development in emerging market economies.

An essential basis for the use of PF is the ring-fencing of the new investment from its sponsors, to ease information production and risk management. Among its benefits, PF can reduce underinvestment, promote cash flow verifiability and reduce cash flows volatility. It is thus surprising that the sponsors also become counterparties to key contracts with the project company. This involvement often complicates the separation between the project company and the sponsors. Sponsor counterparties can be a blessing or a curse to the PF venture. On the one hand, sponsors involvement can potentially make risk management more effective by aligning sponsors interest to that of the project. (Corielli et al., 2010). However, it can increase the likelihood of conflict of interest between sponsors and lenders. These conflicts arise because sponsor counterparties can have control over key variables that affect cash flow. This, in turn, induces opportunistic renegotiation of key contracts like construction or supply agreements. Chapter 4, examines these economic benefits (or costs) of sponsors involvement as counterparties, using a sample of 5871 PF loans signed between 1998 and 2013. Specifically, the chapter examines whether NFCs reduce project risks, which in turn reduce the loan spread and leverage ratios charged by lenders. Next, the chapter examines whether these effects are distorted if the sponsors also act as counterparties to key NFCs.

This chapter hypothesises that the decision to include NFCs, and sponsors as counterparties is endogenous to the loan terms. To control for this endogeneity, the propensity score matching proceudre is used match loan tranches with sponsor counterparties to those without, using observed pre-contractual covariates. The results indicate that loans with NFCs are 32 bps lower. Loan with sponsor counterparties are, however, 25 bps lower, and those with credit- rated counterparties are 37 bps lower. On the leverage ratio, the findings reveal that loan tranches with NFCs are 0.008% lower, those with sponsor counterparties are 0.03% lower, and those with credit-rated counterparties are 0.016% lower. These results are driven by loans signed in developing countries. These findings provide useful insights into PF lending and demonstrate a trade-off between the cost of borrowing (loan spread) and the proportion of debt capital lenders offer in PF ventures. Sponsors must thus analyse this trade-off before engaging as counterparties to the project company.

Political risk continues to hinder the flow of capital into long-term investments globally. In recent years, these risks have heightened because of regulatory changes in developed countries and political instabilities in emerging and developing countries. Extant studies also suggest that political risk can substitute for deficiencies in legal systems and vice versa. In Chapter 5, the thesis explores how political and legal institutions shape PF loan terms. Three research hypotheses are developed. First, the chapter tests whether political institutions influence loan spreads and leverage ratios after controlling for legal institutions and governance. Given the interrelationship between political and legal institutions, the chapter also tests whether political institutions substitute (or complement) deficiencies in legal institutions. The chapter also examines whether the various NFCs used to manage project risks substitute for weaknesses in these institutions. To test these hypotheses, linear regressions are used to relate loan spread and leverage ratio to country-level political and legal institutions. The findings indicate that improvements in political institutions are

associated with lower loan spreads and higher leverage ratio. The findings also indicate that PF loans are less sensitive to political institutions, relative to corporate bonds and bank loans. The study results further reveal that political institutions substitute for legal institutions in relation to the spread, but complements in the case of the leverage ratio. The main policy implication from Chapter 5 is on the sensitivity of PF lending to institutional characteristics. In countries, where either political or legal institutions is weak, PF can generate economic benefits through its lesser response to institution weakness compared to corporate bonds or bank loans. For corporations and sponsors, PF represent a viable alternative for reducing the cost of financing long-term investments.