Measuring the credit risk of unlisted infrastructure debt

Frédéric Blanc-Brude, Omneia R.H. Ismail: This paper develops a framework to measure the credit risk of unlisted infrastructure debt, including the first formulation of "distance to default" in infrastructure project finance.

Author(s) :

Frederic Blanc-Brude

Research Director, EDHEC Risk Institute-Asia

Omneia R.H. Ismail

Senior Research Engineer, EDHEC Risk Institute-Asia

We propose to use the debt service cover ratio (DSCR or the ratio of the firm's free cash flow to its debt service in a given period), which is routinely collected by project finance lenders, to measure and benchmark credit risk in infrastructure project finance. We argue that knowledge of the first two moments of distribution of the DSCR in project finance are sufficient to measure and predict the credit risk of individual loans. We show that the distribution of the DSCR captures asset value and volatility and allows measuring distance to default in project finance. The distribution of the DSCR also provides an unambiguous default point and can thus be used to build a mapping of expected default frequencies (EDFs) in project finance.
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Measuring the credit risk of unlisted infrastructure debt...
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Type : Working paper
Date : le 08/10/2013
Extra information : For more information, please contact EDHEC Research and Development Department [ research@drd.edhec.edu ]
Research Cluster : Finance

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