Infrastructure financing with project bond and credit default swap under public-private partnerships

This paper elaborates the use of project bonds and a credit default swap (CDS) in infrastructure financing under public-private partnerships (PPPs). First, a structural model is presented and calibrated using market data to estimate the default probability of a project company in a PPP project, which lays the foundation for determining the CDS premium. Second, the CDS is priced using the risk-neutral valuation method. Third, sensitivity analysis is conducted to evaluate the impacts of project parameters including capital structure, asset rate of return and volatility, bankruptcy loss rate, and tax rate on the default probability and CDS premium. This study concludes that it is beneficial to governments, project companies, and bond holders to implement bond financing in PPP projects with a fairly priced CDS.