|Factor Name||Factor Definition||Factor Interpretation|
|Size||Outstanding Face Value||Larger instruments tend to have lower spreads confirming a known stylised fact from the empirical literature on credit spreads (See Strahan 2005 on the non-price characteristics of loans. By this hypothesis, lenders extend larger debt instruments to lower credit risks).|
Instruments that are more sensitive to interest rate movement attract a positive risk premia and higher spread for infrastructure corporates, but also lower risk premia for infrastructure project finance loans. This is also in line with long-standing finding in the empirical literature on spreads, including project finance loans.
|Credit Risk||Distance to Default||Higher credit risk as estimated by our borrower-specific credit risk model commands a positive positive risk premia and higher spread.|
|Short Term ratesRates||3-Month Libor||Likewise, controlling for other effects, movements in short-term interest rates impact risk premia.|
|Term||20-year public bond yield minus 3-month public bond yield||The slope of the yield curve can be a good proxy of country risk, both political and macro-economic. The term spread is computed as the time of each valuation, using the relevant curve in the country of the investment. A higher term spread is characterised by a positive risk premia and thus a higher aggregate risk premia.|
|TICCS® Business Risk||Merchant, Regulated or Contracted control variables||Controlling for business risk families as defined in TICCS® shows that merchant companies systematically attract a higher risk premia i.e. expected returns are higher in riskier segments of the infrastructure market.|
|TICCS® Sector||Industrial activity superclass or class control variables||Likewise, a few sectors are found to have systematically higher or lower expected returns even after controlling for the effect of the factors described above e.g. renewable energy projects have systematically lower returns (or higher prices) even for similar size, profits, leverage. etc.|