Loan tenor in project finance

Purpose: The purpose of this paper is to develop a better understanding of the debt structuring of project finance (PF) loans and the main drivers affecting the maturity of bank loans in infrastructure deals. When banks grant loans to a project, they have two decision variables: the interest margin or the spread and the maturity of the loan. Although several studies analyze the drivers of the spread, few studies in the literature look at the maturity of bank loans. As infrastructure projects are typically highly leveraged, the structuring of bank lending is an important parameter in the financial viability of the project. Design/methodology/approach: The paper develops a regression analysis of the loan’s maturity on four categories: characteristics of the project, political risk of the country where the project is executed, the macro-economic setting and the regulatory framework. By using a new data set of InfraDeals containing data on bank loans of more than 1,800 infrastructure projects worldwide from 1997 to 2016, this paper reveals new insights on the debt structuring of banks for PF loans. Findings: The results indicate that the maturity of bank loans granted to infrastructure deals is predominantly driven by political risk and regulation, rather than the structuring of the project. This implicates that the region where the deal is closed weighs more heavily than the specificities of the project itself. Originality/value: The results have important policy implications. The paper allows to develop a better understanding on how political risk and new regulation, like Basel III, might affect the PF market. The paper is the first one finding empirical evidence of the impact of Basel III regulation on PF lending. By delving deeper into the political risk variable, the authors formulate several recommendations to mitigate political risk.