Global Project Finance – Managing, Structuring and Distributing Risk

Global Project Finance (GPF) investing is increasingly requiring strong skills on the

side of the Arranger (the “risk allocator”) in order to realize adequate return benefits,

while avoiding disproportionate risk that

might preclude risk transfer.

GPF underwriters earn their “premium” in a risk adverse financial world by

assuming risk (capital formation, risk transfer and providing liquidity).

An emphasis on price transparency and efficiency is

now becoming more pronounced.

Bank arrangers appear to be playing an increasing role in the GPF

marketplace, primarily as providers of liquidity, and as a risk transfer agency.

Investors can commit capital to a variety of different asset classes (examples include equity, fixed income, commodities, hard

assets and foreign exchange).

Investors are increasingly seeking to take advantage of more flexible investment opportunities in search of higher yield, towards multiple asset classes, trading

styles and markets.

The attributes of investing in GPF, traditionally a risk retention

investment approach, with term take-out from the insurance market,

is now poised to have its asset performance measured across

credit, market, liquidity and model risk.

Improving the measurement of these sources of risk should be a strategic resource, guiding capital deployment

and risk syndication by banks.

In considering an appropriate retention level, the maximum amount of economic

loss across the committed GPF investment period (interim and term) must be

estimated.

Risk can only be priced after it is appropriately

measured.

Analysis by Moody’s and Standard and Poor’s reveals that recovery rates are higher for term GPF exposures then comparably rated corporate debt.

GPF strategies are risk-controlled, diversified/long bias investments, focused

on project related assets (with some commodity attributes, though more stable).

GPF is a low correlation alternative investment

class.

Arrangers are increasingly sourcing and identifying suitable underwriting and

principal investing opportunities that can produce high risk adjusted returns.

More generally GPF appears to be low frequency default risk, characterized by certain sector defaults evidencing

high severity exposures.

Global Project Finance – Managing, Structuring and Distributing Risk