Empirical Study of Optimal Capital Structure and the Debt Capacity of BOT Projects

It is world widely trend for governmental agencies to promote private sectors to participate in the development of infrastructures, such as BOT projects. However, BOT projects are inherently risky due to too many uncertainties during the project period. Overoptimistic in revenue and lack of risk analysis in BOT projects might usually lead the concessionaire to misestimate the project feasibility. This may result in high probability of defaults (PD) of BOT projects and cause financial disaster toward concessionaire. In the worst situation, it could make the projects become unbackable. However, it is rarely to discuss the probability of defaults and bankruptcy cost in the conventional BOT financial model. In general, capital structure of BOT projects is assumed 30% of equity and 70% of debt, and debt repayment is arranged in repaying equivalent uniform annul cost debt in repayment periods. This kind of repayment arrangement does not consider the erratic nature of revenue. It is risky to repay the debt obligation with inflexible repayment term. And, it may lead to high PD of the projects. The objective of this study was to alleviate the risk of project defaults due to the volatility of revenue. A student dormitory project of the national United University in Taiwan is used as an empirical study to demonstrate the analysis. The repayment arrangement proposed in this paper could make the 35% PD of the project reduce to less than 1% PD.