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http://dx.doi.org/10.15266/KEREA.2014.23.4.643

The Impacts of the Optimal Non-Financial Contractual Structure on the Leverage Ratio in Project Finance  

Lee, Changmin (Hanyang University Business School)
Choi, Bongseok (Korea Energy Economics Institute)
Kim, Seon Tae (Department of Business Administration, ITAM Business School)
Publication Information
Environmental and Resource Economics Review / v.23, no.4, 2014 , pp. 643-665 More about this Journal
Abstract
We study the optimal policy of the contracual arrangement in raising the debt-to-equity ratio for oil, gas and mining project finance deals. We investigate the impact of the optimal contractual relationship between counterparties on the soundness of projects, differing in output price volatility and country risk. Key findings are: first, the existence of EPC sponsors and off-takers generally raises the debt-to-equity ratio. In particular, EPC sponsors and off-taking sponsors jointly mitigate the credit risk caused by counntry risk. Seocond, off-taking and EPC contracts jointly help mitigate the credit risk caused by the country risk, rather than the price volatility. Indeed, the contractual structure raises the debt-to-equity ratio.
Keywords
Project finance; Non-financial contract; Price risk; Country risk;
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