TY - JOUR T1 - An Approach to Credit Risk Valuation for Structured and Project Finance Transactions JF - The Journal of Structured Finance SP - 53 LP - 67 DO - 10.3905/jsf.2001.320236 VL - 6 IS - 4 AU - Marc Freydefont Y1 - 2001/01/31 UR - https://pm-research.com/content/6/4/53.abstract N2 - This article presents an approach to loan valuation under credit risk in the case of single-asset firms (project finance, asset-backed securitizations, venture capital, etc.). The methodology draws on the Merton approach of a contingent claim model for valuation of credit risk, whereby the firm's liabilities (from the most senior debt to subordinated convertible debt and ultimately to equity) are viewed as contingent claims issued against the firm's underlying assets. The creditors, by extending a loan to the company, implicitly sell a put option to shareholders giving them the right to put the assets of the firm to creditors in case of default. The approach allows the valuation of risky credit debt instruments taking into account their ranking in the cash waterfall, that is, their seniority level. Given the probability distribution of the market value of the assets, the necessary risk premium as well as the related endogenous default probabilities and recovery rates are derived for each tranche of funding. ER -