Risk factors influencing the debt leverage of project financing initiatives in the energy industry

Abstract

Risk factors influencing the debt leverage of Project Financing initiatives in the energy industry Purpose-This paper contributes to understanding the crucial influence of risks on the capital structure of Project Financing (PF) initiatives in the energy sector. Design/methodology/approach-The debt leverage of a capital investment is selected as the response variable and its relation with select identified risk factors is examined using a regression analysis on a dataset of 72 projects carried out all over the world in the energy industry. Findings-Results have highlighted that the debt leverage is significantly influenced by several sources of risk. Country, Project, and Special Purpose Vehicle related risks have been shown to have an impact on the debt leverage of a PF scheme. Research limitations/ Implications-The results could support both investors and lenders to better define the financial leverage of projects delivered under a PF mechanism. In particular, the study could help to have a better understanding of the main factors that influence the debt leverage in PF initiatives. Originality/value-This paper contributes to filling the lack of works addressing the relationship between risk factors and capital structure in PF projects. In this way, this research leads to a better understanding of the risk factors that influence the capital structure of a PF initiative and they have therefore been proposed as a basis for the establishment of improved methods to design refined capital structures.

Assessing the Indonesian Banking Risk: A Comparative Study between Islamic and Conventional Banks

“…Debt has disadvantage such as difficulty caused by debt obligations. This is in line with the research conducted by De Marco and Mangano (2017) which says that high-risk countries are associated with higher debt level and decreased equity of capital injections.…”

“…According to De Marco and Mangano (2017), the risk measure is debt leverage because this ratio can be used to calculate how much debt portion a company needed to finance itself while in fact the greater the debt, the greater the risk of bankruptcy. Thus, the higher risk will be associated with the higher level of debt.…”

“…From the lenders perspective, they would tend to reduce the debt according to risk profile while the equity investors would require a higher debt to minimize their capital injections (De Marco & Mangano, 2013). The higher risk is related to the higher level of debt and decreases the equity capital injections (De Marco & Mangano, 2017).…”

Determinants of Enterprises’ Capital Structure in Energy Industry: Evidence from European Union

“…This means an increased need for external capital, which in turn increases the financial risk of the industry. By contrast, during growing economic prosperity, an underinvested energy infrastructure that frequently does not match the increased demand for energy, raises the business risk of the industry [55,56]. Hence, it can be expected that the level of both risk components of the energy industry can significantly influence corporate debt: Hypothesis 2a.…”

Balanced Scorecard-Based Evaluation of Sustainable Energy Investment Projects with IT2 Fuzzy Hybrid Decision Making Approach

“…According to the results of the analysis, they stated that it is risky to lend large-scale projects of firms with high FX indebtedness. De Marco and Mangano [47], on the other hand, argued that in this decision stage, the riskiness of the country in which the company operates is considered. According to Choi and Kim [48], financing decisions of large-scale projects are very risky in a market where oil prices are volatile.…”