Legal Risk as a Determinant of Syndicate Structure in the Project Finance Loan Market

This paper examines how legal risk, defined as the strength of creditor rights and legal enforcement, affects debt ownership concentration in the project finance loan market. Using a sample of 495 project finance loan tranches from 61 countries, worth $151 billion, we document high levels of debt ownership concentration: the largest single bank holds 20.3% while the top five banks collectively hold 61.2% of a typical project finance loan tranche. We also show that weak creditor rights and poor legal enforcement are associated with more diffuse ownership structures, which leads us to conclude that international project finance lenders structure syndicates to deter strategic default rather than to enhance monitoring incentives or facilitate low-cost re-contracting in the event of default. On a more theoretical level, the results illustrate the continuous nature of debt ownership and refute the overly simplistic distinction between single bank creditors and atomistic public bondholders commonly described in the literature. Key words: bank lending, project finance, syndication, international corporate governance, creditor rights, legal rules and enforcement