Critical risk factors of the project finance loan spread in the infrastructure sector: Experience from the ASEAN countries

Elvi Nasution,Gracia Shinta S,Ugut Ugut,Sugiarto Sugiarto,Edison Hulu

doi:10.5267/j.ac.2021.3.013

Abstract

This paper finds that in ASEAN-4, the micro loan characteristics: loan amount and LIBOR whilst the macro characteristics: inflation, net export and GDP growth influence the loan spread in the project finance. However, simultaneously at the country level, the determinants of the loan spread are distinctive to each country’s infrastructure industry characteristic. The paper’s main contribution relates to the determinants of the project finance loan spread at the country level and regional level, ASEAN-4. The purpose of this paper is to fathom the critical risk factors behind the project finance loan pricing differential across the ASEAN-4 countries. Hence, the policy makers, project developers and lenders can have a better understanding of the drivers behind the project finance loan spread pricing. The study adopted an ordinary least square (OLS) regression methodology and collected data from ASEAN-4 countries consisting of Indonesia, Malaysia, Philippines, and Thailand.

Highlights

The debt capital market consists of the corporate bonds and the syndicated loans whereas the syndicated loans comprising at least two financial institutions are the major substitute to corporate bonds in terms of financing decisions
This paper finds that in ASEAN-4, the micro loan characteristics: loan amount and London Interbank Offered Rate (LIBOR) whilst the macro characteristics: inflation, net export and GDP growth influence the loan spread in the project finance
Project finance is a specialized and unique branch of finance that is defined by Gatti (2008) as the structured financing of a particular economic unit in a special purpose vehicle (SPV) or project company produced by the project developer through equity or mezzanine debt in which the lender is content with the cash flows and earnings of SPV as the main source of debt repayment for the project finance loan and the assets of the SPV as the collateral for the loans

Summary

Introduction

The debt capital market consists of the corporate bonds and the syndicated loans whereas the syndicated loans comprising at least two financial institutions are the major substitute to corporate bonds in terms of financing decisions. The deregulation of the infrastructure sector: electricity, water, telecommunication, and others in the ASEAN four countries of Indonesia, Malaysia, Philippines and Thailand, prompts many international investors simultaneously with expansion of the global banks to the developing countries; searching for the new market prospect and a higher yield on their infrastructure project loan. Global banking’s pursuit in the developing countries for the return represented by the loan spread over the risk-free yield represented by the London Interbank Offered Rate (LIBOR). In order to attract private sector participation in infrastructure, the host country government typically provides a guarantee in the form of the explicit or implicit government guarantee for the private sector to mitigate a number of risks that is difficult to address by the private sector

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