Impact of Interest and FX Rate on Breach of DSCR in Project Finance

Abstract

Project financing (PF) is a technique that lenders finance based on a project's future cash flow and asset value. PF based on business feasibility has emerged and is being adopted in the global market to promote and facilitate infrastructure projects. In this study, key financial factors impacting the status of project finance will be reviewed. System dynamics model of causal relations between the factors will be created, utilizing the stock-flow diagram and simulated with time series data available for the key elements, using Monte Carlo simulation. In particular, the authors will start with a hypothesis that a financial covenant will provide a strong link with default situation of a project and the debt coverage service rate (DSCR) has the function. Volatilities of interest rate and FX rate will be examined regarding the sensitivity towards the DSCR. This article will eventually present the theoretical basis for the decision behavior of hedging to mitigate fluctuation risks of financial factors and some implications.