Arranger Certification in Project Finance

Abstract

We examine certification by lead arrangers of project finance (PF) syndicated loans, because PF vehicle companies are stand-alone entities, created for a single purpose, with all valuation impacts contained in the project financing package. Using a sample of 4,122 project finance loans, worth $769 billion, arranged between 1991 and 2005, we show that certification by prestigious lead arranging banks creates economic value by reducing overall loan spreads compared to loans arranged by less prestigious arrangers. Banks participating in these loan syndicates, rather than the project sponsors, are the parties that pay for certification, and do so by allowing top-tier arrangers to keep larger fractions of the up-front arranging fees, though overall fees are reduced when a prestigious bank arranges a loan. Our results are robust to correcting for endogenous choice of loans by prestigious arrangers, and we show that certification is most valuable during periods of extreme financial stress.

Keywords: international corporate governance, bank lending, project finance, syndication

JEL Classification: G21, G32, F34, K33