Project Finance | How To Weigh High Yield Against Expected Losses

In what seems like a perennial state of low interest rates, there appears to be no end in sight to market participants’ search for income. Decreasing bond yields – some markets even flirting with negative yields – has meant the search continues to expand away from the traditional bond markets and towards alternatives, which may offer steady income.

An area where we are seeing increasing interest from market players is the higher yielding project finance industry with its steady projected cash flows, which offers some means to achieving returns not available elsewhere in the current yield-tight environment.

There is, however, the perception that higher yield projects will involve the risk of higher losses, and as with most investments, higher returns can go hand-in-hand with additional risks. Although past performance does not guarantee future results, returns may be influenced by a number of factors, including the asset class itself.

In the case of project finance, market players should understand the importance of reliable risk measurement calculations...

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