2.2.3 Selected variables in the models

_Covariates

_Model

_Definition

_{Economic rational} 

_{Interest Coverage Ratio}

_{Corporate debt}

_{Operating profit divided by 
interest expense.}

_{Interest Coverage Ratio measures a company’s ability to meet interest payments on its debt obligations, with higher ratios indicating lower default risk due to greater earnings relative to interest expenses.}

_{Debt to Asset Ratio}

_{Corporate debt}

_{Total debt divided by total assets}

_{Debt to Asset Ratio reflects the proportion of a company’s assets financed by debt, influencing default risk with higher ratios indicating higher leverage and potentially increased default risk.}

_{Cash Ratio}

_{Corporate & project debt}

_{Cash divided by current assets}

_{Cash Ratio, indicating a company’s ability to cover its short-term liabilities with cash and cash equivalents, may mitigate default risk by ensuring liquidity for debt obligations.}

_{Size of the Firm}

_{Corporate debt}

_{The size of the firm refers to its scale of operations, typically measured by factors such as total assets, revenue, and market capitalisation}

_{Size of the Firm, often reflecting its financial stability and diversification, influences default by providing greater resources to weather economic downturns or fulfil debt obligations.}

_Age

_{Corporate debt}

_{In business since incorporation}

_{Age represents its experience and stability in the market, impact default by indicating a track record of financial management and resilience against economic challenges}

_{Risk-free Rate}

_{Corporate & project debt}

_{3-month risk-free rates for the countries and dates}

_{The Risk-free Rate, as a benchmark for return on investment with minimal risk, influences default by affecting the opportunity cost of capital and the cost of borrowing for firms, thereby shaping their financial viability, debt repayment capability and capital management.}

_{Leverage Ratio}

_{Project debt}

_{Sum of senior outstanding 
liabilities divided by total 
assets}

_{A higher Leverage Ratio generally increases default risk, indicating that firms with higher levels of debt relative to equity may struggle to meet their financial obligations, leading to a higher likelihood of default.}

_{Cash Flow Available for Debt Service}

_{Project debt}

_{Cashflows available for debt 
service prefinance post-tax}

_{A higher Cash Flow Available for Debt Service typically reduces default risk, as it indicates the firm’s ability to generate sufficient cash to meet its debt obligations, thereby lowering the likelihood of default.}

_{Quick Ratio}

_{Project debt}

_{Cash at bank plus accounts 
receivable divided by current 
liabilities}

_{A higher Quick Ratio suggests better liquidity and short-term solvency, potentially reducing default risk by enabling the firm to meet its short-term liabilities more comfortably.}

_{Return on Assets}

_{Project debt}

_{Net profit after tax divided by total assets}

_{A higher Return on Assets indicates better profitability and operational efficiency, which can mitigate default risk by enhancing the firm’s ability to generate earnings to cover its obligations.}

_{Note: Additional business risk and geographic location covariates used}