Abstract
Most project operations management belongs to the type of public-private partnership (PPP), which is usually dynamic. This paper aims to propose a method for optimizing the price of credit default swaps (CDS) for the dynamic PPP system. This study investigates the credit risk measurement of PPP project financing and the pricing of risk mitigation instruments which are widely used in the case of immature markets in the early stage of China’s PPP development. Based on the credit risk measurement theory of the corporate and debt ratings, this paper considers the differences in various credit enhancement methods in the equity-like debt agreement and determines the credit rating of the equity-like debt in PPP projects. Some optimization methods are also proposed to derive the probability of default, so as to determine the price of the credit risk mitigation instrument of CDS which is based on the equity-like debt.
Highlights
IntroductionAs a long-term partnership of public sector (government) and private sector (for-profit or nonprofit companies) which is established by signing formal agreements, public-private partnership (PPP) has the advantages of revitalizing existing assets, transforming government functions, and improving the quality of public services in the provision of public goods or services
As a long-term partnership of public sector and private sector which is established by signing formal agreements, public-private partnership (PPP) has the advantages of revitalizing existing assets, transforming government functions, and improving the quality of public services in the provision of public goods or services
This study investigates the credit risk measurement of PPP project financing and the pricing of risk mitigation instruments which are widely used in the case of immature markets in the early stage of China’s PPP development
Summary
As a long-term partnership of public sector (government) and private sector (for-profit or nonprofit companies) which is established by signing formal agreements, public-private partnership (PPP) has the advantages of revitalizing existing assets, transforming government functions, and improving the quality of public services in the provision of public goods or services. Zhang [6] has classified PPP risks in more detail: political, economic, and social environment, natural environment, third-party infringement, engineering decision-making and preparation, payment, supervision, completion and handover process, coordination, and relations This helps participants who are not familiar with the project identify risks quickly. In the typical nonmature Chinese market, due to the lack of the secondary market price of the project company’s equity, the complete disclosure of operating and financial information, and the related complete financing service system, we combine the corporate credit risk measurement with the measurement of supporting credit of third-party’s forward repurchase equity and making up principal and interest shortfalls, based on the bond yield curve of the Chinese market, we use the JarrowTurnbul binary tree model to derive its default probability and determine the price of CDS which is based on the debt
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