Cash Flow Dynamics of Private Infrastructure Project Debt, Empirical evidence and dynamic modelling

by Frédéric Blanc-Brude, Majid Hasan, Timothy Whittaker
In this paper, the authors rely on a new and unique dataset of infrastructure project cash flows to compute and document the dynamics of debt service cover ratios (DSCRs) in private infrastructure projects, thus allowing the implementation of a fully-fledged structural credit risk model.

This dataset is one of the early outputs of a substantial effort launched at EDHEC to collect private information and document the investment characteristics of infrastructure investments, and create a global database of infrastructure cash flows spanning several decades.

In a context were data paucity remains a concern and complete time series of cash flows covering the decade-long life of investments remain rare, the authors also propose a novel approach to modelling and predicting the “trajectories” of DSCRs in infrastructure projects. The paper documents the existence of homogenous “families” of cash flow dynamics in infrastructure projects that are best explained by the contractual characteristics of these investments as well as the initial financial structuring choices made jointly by project sponsors and creditors.

Hence, this paper also addresses the question of the path-dependency found in project dynamics and the resulting serial correlation of returns, especially in cases where achieving full diversification might be challenging. Borrowing from statistical methods usually applied in the physical sciences, the authors show how new information arriving sequentially, which is typical of long-term investment in infrastructure, can be integrated to infer the conditional parameters of cash flow distributions and the related credit risk measures for subgroups or even individual investments.

Publication focus:

Academic finance
Risk Management
Asset pricing
not much
a lot
a lot
part of the EDHEC/NATIXIS Research Chair 2012-2015
Cash Flow Dynamics of Private Infrastructure Project Debt, Empirical evidence and dynamic modelling (Frédéric Blanc-Brude, Majid Hasan, Timothy Whittaker), In EDHEC Infrastructure Institute Publications, volume March, 2016.