Risk Shifting Through Nonfinancial Contracts : Effects on Loan Spreads and Capital Structure of Project Finance Deals

We study capital structure negotiation and cost of debt financing between sponsors and lenders using a sample of more than 1,000 project finance loans worth around US $195 billion closed between 1998 and 2003. We find that lenders: (i) rely on the network of non-financial contracts as a mechanism to control agency costs and project risks, (ii) are reluctant to price credit more cheaply if sponsors are involved as project counter-parties in the relevant contracts, and finally (iii) do not appreciate sponsor involvement as a contractual counterparty of the special purpose vehicle when determining the level of leverage