Project Finance Collateralised Debt Obligations: An Empirical Analysis on Spreads Determinants

Abstract

This study investigates the determinants of spread on structured finance issues backed by project finance (PF) loans. We find that credit rating is the most important variable in determining tranche spread at issue. We also document how factors that are important for pricing in the case of corporate bonds, such as market liquidity and weighted average maturity, are also relevant for determining spreads on project Collateralized Debt Obligations (CDOs). Furthermore, we find that the nature of the underlying assets has a substantial impact on CDO pricing, indicating that primary market spread is significantly higher when the underlying PF loans bear a higher level of market risk as compared to issues backed by projects with low market risk exposure. The larger proportion of projects still under construction in the securitized portfolio is another feature that explains the level of at-issue spread.