TY - JOUR

T1 - Assessment and mitigation of credit risks in project financing

AU - Naumenkova, Svitlana

AU - Tishchenko, Ievgen

AU - Mishchenko, Svitlana

AU - Mishchenko, Volodymyr

AU - Ivanov, Viktor

PY - 2020/3/6

Y1 - 2020/3/6

N2 - Lending to long-term investment projects in fragile countries requires additional financial instruments to control the sustainability of project cash flows and to increase the borrower’s financial discipline in debt servicing. This paper analyzes the special aspects of using financial covenants as credit risk mitigation instruments in project financing in Ukraine. It also argues that regulatory requirements to maintain financial strength indicators at the appropriate level have an indirect impact on the change in project finance loan rates. The study primarily aims at developing approaches to defining a credit rate corridor for an investment project, depending on changes in the values of financial sustainability indicators. The implementation of the proposed approach allows increasing the validity of credit risk components for investors and optimizing capital value for borrowers. As required by international practice, violation of covenant terms is the trigger for satisfying the creditors’ claims. According to the authors’ conclusions, the use of financial covenants as a tool for protecting the creditors’ interests should not be an instrument of unreasonable financial pressure on borrowers. The study reveals benefits and drawbacks of using financial covenants to mitigate credit risk and reduce the probability of a borrower default in the field of project financing in Ukraine.

AB - Lending to long-term investment projects in fragile countries requires additional financial instruments to control the sustainability of project cash flows and to increase the borrower’s financial discipline in debt servicing. This paper analyzes the special aspects of using financial covenants as credit risk mitigation instruments in project financing in Ukraine. It also argues that regulatory requirements to maintain financial strength indicators at the appropriate level have an indirect impact on the change in project finance loan rates. The study primarily aims at developing approaches to defining a credit rate corridor for an investment project, depending on changes in the values of financial sustainability indicators. The implementation of the proposed approach allows increasing the validity of credit risk components for investors and optimizing capital value for borrowers. As required by international practice, violation of covenant terms is the trigger for satisfying the creditors’ claims. According to the authors’ conclusions, the use of financial covenants as a tool for protecting the creditors’ interests should not be an instrument of unreasonable financial pressure on borrowers. The study reveals benefits and drawbacks of using financial covenants to mitigate credit risk and reduce the probability of a borrower default in the field of project financing in Ukraine.

KW - CC&Rs

KW - Covenants

KW - Credit risk

KW - Debt-service coverage ratio

KW - Loan life coverage ratio

KW - Project financing

KW - Ukraine

UR - http://www.scopus.com/inward/record.url?scp=85082421705&partnerID=8YFLogxK

U2 - 10.21511/bbs.15(1).2020.08

DO - 10.21511/bbs.15(1).2020.08

M3 - Article

AN - SCOPUS:85082421705

VL - 15

SP - 72

EP - 84

JO - Banks and Bank Systems

JF - Banks and Bank Systems

SN - 1816-7403

IS - 1

ER -