Credit-spread determinants and interlocking contracts: A study of the Ras Gas project

This paper provides an in-depth study of the allocation of a firm's residual risks not explicitly managed through interlocking contracts in the context of project finance. Focusing on the Ras Gas project, we relate its credit spreads as a measure of investor risk perceptions to firm-specific risk factors in the context of 25-year supply agreements, debt covenants, and a debt-service guarantee contingent on output prices. Consistent with theoretical predictions, we find that unmanaged risk factors affecting the supply agreement drive Ras Gas’ credit spreads, whereas managed ones have no effect. Interpreting our findings as evidence for the nexus-of-contracts view of the firm, we discuss some implications for financial design and valuation.