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The Journal of Structured Finance

The Journal of Structured Finance

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Project Finance with Limited Recourse

An Option Pricing Approach to Debt Capacity and Project Risk

Michel Gendron, Van Son Lai and Issouf Soumaré
The Journal of Structured Finance Fall 2007, 13 (3) 97-104; DOI: https://doi.org/10.3905/jsf.2007.698660
Michel Gendron
A professor of finance and director of the Department of Finance & Insurance, faculty of business administration at Laval University in Québec, Canada.
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  • For correspondence: michel.gendron@fsa.ulaval.ca
Van Son Lai
A professor of finance in the Department of Finance & Insurance, faculty of business administration at Laval University in Québec, Canada.
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  • For correspondence: vanson.lai@fsa.ulaval.ca
Issouf Soumaré
An assistant professor of finance in the Department of Finance & Insurance, faculty of business administration at Laval University in Québec, Canada.
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  • For correspondence: issouf.soumare@fsa.ulaval.ca
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Abstract

Project finance has become an important method for financing large-scale, capital-intensive projects, such as power plants, oil pipelines, roads, tunnels, etc. We analyze debt capacity and risk choice in a project finance arrangement where the project's lenders have limited recourse to the sponsoring company's assets. We draw a parallel between vulnerable financial guarantee loans and project finance loans with limited recourse. Using contingent claims analysis, we illustrate the trade-offs between risk and debt capacity in those cases where the project's lenders have recourse to the sponsor's assets and in those where they do not.

TOPICS: Credit risk management, project finance, volatility measures

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The Journal of Structured Finance
Vol. 13, Issue 3
Fall 2007
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Project Finance with Limited Recourse
Michel Gendron, Van Son Lai, Issouf Soumaré
The Journal of Structured Finance Oct 2007, 13 (3) 97-104; DOI: 10.3905/jsf.2007.698660

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Project Finance with Limited Recourse
Michel Gendron, Van Son Lai, Issouf Soumaré
The Journal of Structured Finance Oct 2007, 13 (3) 97-104; DOI: 10.3905/jsf.2007.698660
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