Arranger certification in project finance

Though it is highly plausible that third-party certification could create value in capital market financing, empirical research has yielded ambiguous evidence of this, due to confounding influences and multiple impacts. We examine certification by lead arrangers of project finance (PF) syndicated loans, because PF vehicle companies are stand-alone entities, created for a single purpose, with all valuation impacts contained in the project financing package. Using a sample of 4,122 project finance loans, worth $769 billion, arranged between 1991 and 2005, we show that certification by prestigious lead arranging banks creates economic value by reducing overall loan spreads compared to loans arranged by less prestigious arrangers, and by allowing larger and more highly leveraged PF deals to be funded. Banks participating in these loan syndicates, rather than the project sponsors, are the parties that pay for certification, and do so by allowing top-tier arrangers to keep larger fractions of the up-front arranging fees.