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Calibrating Credit Risk Dynamics in Private Infrastructure Debt

Frédéric Blanc-Brude, Majid Hasan and Timothy Whittaker
The Journal of Fixed Income Spring 2018, 27 (4) 54-71; DOI: https://doi.org/10.3905/jfi.2018.27.4.054
Frédéric Blanc-Brude
is the director of EDHEC Infrastructure Institute and EDHEC Asia Pacific at EDHEC Business School in Singapore
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Majid Hasan
is an associate research director of EDHEC Infrastructure Institute at EDHEC Business School in Singapore
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Timothy Whittaker
is an associate research director of EDHEC Infrastructure Institute at EDHEC Business School in Singapore
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Abstract

Recent research has demonstrated that structural credit risk models are capable of explaining the credit risk process for private, illiquid debt. This article extends this literature by proposing a simple and intuitive calibration approach using Bayesian inference to capture the nonlinear dynamics of debt service cover ratios using a new dataset of private cash flows collected by hand for 267 European infrastructure projects spanning 17 years. The combination of a cash flow–driven structural model with observable cash flow data and Bayesian inference enables the measurement of default risk even when few or no defaults have been or can be observed, whereas reduced-form models like the ones used by rating agencies necessarily lead to biased credit risk estimates for private debt.

TOPICS: CLOs, CDOs, and other structured credit, real assets/alternative investments/private equity, statistical methods, credit risk management

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The Journal of Fixed Income: 27 (4)
The Journal of Fixed Income
Vol. 27, Issue 4
Spring 2018
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Calibrating Credit Risk Dynamics in Private Infrastructure Debt
Frédéric Blanc-Brude, Majid Hasan, Timothy Whittaker
The Journal of Fixed Income Mar 2018, 27 (4) 54-71; DOI: 10.3905/jfi.2018.27.4.054

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Calibrating Credit Risk Dynamics in Private Infrastructure Debt
Frédéric Blanc-Brude, Majid Hasan, Timothy Whittaker
The Journal of Fixed Income Mar 2018, 27 (4) 54-71; DOI: 10.3905/jfi.2018.27.4.054
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  • Article
    • Abstract
    • FRAMEWORK
    • DATA AND PRELIMINARIES
    • MODELING DSCR DYNAMICS
    • MODEL CALIBRATION RESULTS
    • CREDIT RISK IMPLICATIONS
    • APPENDIX A
    • ENDNOTES
    • REFERENCES
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