by Frédéric Blanc-Brude, Roger Strange
This paper analyses the drivers of credit spreads in project finance loans to `Public-Private Partnerships’ or PPPs, an increasingly popular form of procurement worldwide. PPPs are project finance transactions for which project output is a function of government policy (health, transport, education etc.). The use and the cost of private finance in PPPs is probably their most controversial aspect, and understanding the determinants of the cost of debt in such highly leveraged projects is thus important to both originators and policy makers. Using a large sample of credit spreads on debt extended to PPP projects in Europe over the past 15 years, we find very robust statistical results explaining the drivers of PPP debt spreads. Thus, market risk is the only driver of credit spreads in a large portfolio of PPP debt and technical risks are successfully diversified through the project’s network of contracts. Importantly, and contrary to standard debt pricing models, loan size, maturity or leverage are not significant determinants of the cost of debt in PPPs, reflecting a high degree of confidence by lenders that loans will be repaid or recovered. These results support the view that the use of project finance in PPPs works towards risk mitigation and a long term outlook in public projects delivered by the private sector.
How Banks Price Loans to Public-Private Partnerships: Evidence from the European Markets (Frédéric Blanc-Brude, Roger Strange), In Journal of Applied Corporate Finance, volume 19, 2007.