Default Risk in Project Finance

Abstract

Understanding default risk in project finance is relevant to investors. This article investigates which factors are most strongly associated with the occurrence of project finance default, using data from 210 projects, of which 37 were in default. The authors found that the use of proven technology, a sponsor with experience, a high debt service coverage ratio, and the absence of commercial risk cover are associated with lower default risk. The article also provides further insights into the relationships among the factors associated with default risk, and it discusses managerial implications for managing project finance default risk.