Project Finance Collateralised Debt Obligations: an Empirical Analysis of Spread Determinants

Credit rating is the most important variable in determining tranche spread at issue on collateralized debt obligations (CDOs) issues backed by project finance (PF) loans. Factors that are important for pricing in the case of corporate bonds, such as market liquidity and weighted average maturity, are also relevant for determining spreads for these securities. Furthermore, the nature of the underlying assets has a substantial impact on CDO pricing: Primary market spread is significantly higher when the underlying PF loans bear a higher level of market risk and when the proportion of projects still under construction in the securitized portfolio is larger.