Debt Service Obligations Research Articles

The causes and consequences of world recession

Diverging trends in productivity since the late 1960s, if not before, between the United States and its competitor countries, lie at the heart of the global slump. Over the 1970s, these trends began to be reflected in large deficits in commodity trade - but the tendency was to resolve them by means other than increased investment: at first devaluation, later restrictive monetary policies and rising unemployment. None of these policies helped significantly to achieve the needed structural adjustments but they did serve to aggravate the position and prospects of the poorer developing countries. By the 1980s, this became a crisis situation of serious proportions. Often drought and war or civil strife have reinforced economic difficulties, compounded further in many countries by rising debt service obligations and declining real commodity prices. This combination of external and internal difficulties certainly contributed in the poorer countries to the slowdown, since the 1960s, in reducing infant mortality and in tackling basic child survival and development issues. The impressive progress in reducing IMR by an average of 2% or more a year by a number of developing countries, however, shows what can be done. Although rising expenditure is by no means a sufficient condition for child progress, declining expenditures and severe balance-of-payments problems greatly constrain programmes for expanding child services.

Country Risk: A Model for Predicting Debt Servicing Problems in Developing Countries

Recent events in the international capital markets with more than thirty countries in the last two years unable to meet their debt service obligations have focused attention on the method of country risk analysis used by international banks and financial agencies.

Coal Project Financing

Introduction Coal projects are generally large, with high capital needs, long-term payback, and a number of significant risks. They can have very complex ownership and sales agreements. Project financing is a technique used to enable the adequate underwriting of the construction, expansion or acquisition of a viable project, based primarily on its future ability to generate a cash flow, with the terms of repayment tailored to that cash flow stream. It is a limited recourse form of financing and, provided the project has been completed and is operating satisfactorily the lenders look solely to the economic outcome of the project, and not beyond it to the income or other assets of the sponsor. It is also a flexible method of financing, requiring a complete review of the technical and commercial aspects of a project, and provides for the integration of various sources of finance and the sponsor's needs, usually resulting in a financing structure which is both unique and flexible, to accommodate the project's nature and probable future. What must not be forgotten by the sponsor, however, is that the lenders provide funds to a project on a temporary basis, and that they expect to be repaid according to a specified" schedule. They cannot provide such funds until they are satisfied that the project is economically sound, that it will operate as planned, and that it will be able to pay its debts. Approach The usual approach to project financing, regardless of the availability of an acceptable financial guarantee, is to ensure that the project is structured so that it can be tailored to the project revenues to cover operating costs and debt service obligations, and to provide a return to investors. This involves a very comprehensive analysis of the project to verify its technical, commercial, economic and financial viability, together with an assessment and preliminary structuring of the risks associated with the project. This has the advantage of permitting an independent and objective risk/return assessment before the sponsor is required to commit significant funds to the project, and in some circumstances may limit the sponsor's financial commitment to significantly less than that of a conventionally secured loan; and identifies these minimum commitments at an early stage. After the viability of a project has been established by such a comprehensive and detailed analysis, the investigation, negotiation and optimization of multi-source funds is undertaken, with the objectives of minimizing the financing cost and matching the loan repayment schedule to the project's cash flow, consistent with the sponsor's other financing objectives. Another advantage of this approach is that it enables a comprehensive and professional approach to be made to export/import credit agencies and other financial institutions which might become involved in the transaction. Sponsor Commitment A typical project requires the sponsor to have a minimum participation of an equity contribution, say about 25 to 30% of the capital cost, plus several construction completion guarantees of each sponsor which assure the lenders that the project is not abandoned during construction and of cost control, with cost overruns being the sponsor's prime responsibility.

Projecting Debt Servicing Capacity of Developing Countries

This article, Projecting Debt Servicing Capacity of Developing Countries, was reprinted with permission from the December 1981 issue of the Journal of Financial and Quantitative Analysis. Many less developed countries rely on foreign loans to fuel their economic development. In the wake of the oil crisis of 1973, many countries have experienced enormous growth in external indebtedness. Some have required loan deferral or rearrangement. This article aims to devise an empirically based composite indicator of a country's ability and willingness to honor its foreign debt service obligations during some future time period. The examined factors are the debt service ratio, the foreign exchange reserves to imports ratio, the ratio of net noncommercial foreign exchange inflows to debt service payments, the ratio of commercial foreign exchange inflows to debt service payments, the exports to gross national product ratio, and the real per capita gross national product to U.S. per capita gross national product ratio. The model projects a country's debt servicing capacity based on empirical data. The predictive model is intended to complement, not replace, a thorough country analysis which examines nonquantifiable factors.