14 _KR W,_ the logarithm of the Korean Won - US Dollar spot rate, _KOSPI,_ the logarithm of the Korea Composite Stock Price Index, _KRR,_ a credit rating index for Korea, Kepco and Kogas, and _MEA,,ASIA,,EUR,,LAT,_ the continuously compounded daily returns of the JP Morgan regional total return indices in USD for emerging markets in the Middle East-Africa, Asia, Europe and Latin America, respectively.

In terms of estimation strategy, we start with the two key variables depicted in Exhibit 6, the oil price and Kepco bond yield spreads, and successively add explanatory variables to the regression equation estimated by OLS. First, we focus on the supply contract specific variables of oil price and Kepco bond yield. Next, we will add contemporaneous and lagged emerging debt market returns to analyze systematic effects such as spill-overs and contagion. We then include variables related to Korean country risk before estimating models with all variable categories. It turns out that for any number of variables and their lags the residuals exhibit high serial correlation. Adding a lagged dependent variable generally fixes this problem as evidenced in Table 2 (Durbin and Watson d statistic). Given the high frequency of the data, it comes at no that daily credit spreads exhibit a very high degree of persistence: the coefficient on lagged spreads is close to unity.

Tables 2 to 7 in the Appendix report the best fit estimation results after specification testing eliminated highly insignificant control variables. As we would expect, Ras Gas spreads vary positively with Kepco credit spreads: the second specification in Table 2 indicates that a 100 basis point increase in Kepco spread widens the Ras Gas spread by about 2 basis points. Hence, the perceived riskiness of the off-taker feeds through immediately to Ras Gas yield spreads which is consistent with the nexus of contract view of the firm. In light of the contractual incompleteness of the off-take agreement, credit migration by the dominant output buyer affects market risk perceptions of the firm in terms of yield spreads: off-take risk is shifted from Ras Gas owners to its bondholders as predicted by debt agency theories.

Including the lagged Kepco spread reveals that bondholders overreact to news about the off-taker. Initially, Ras Gas spreads widen by 15.5 basis points for every 100 basis point increase in Kepco spreads. However, the next day they narrow by 13.6 basis points (coefficient on the lagged Kepco yield spread) all other things being equal. A comparison between the second and third regressions reported in Table 2 shows the 2 basis points spread widening is the net reaction over a two day period. Since further lags of the Kepco spread come out insignificant we interpret the change of sign between the initial and lagged reaction as a sign of over-reaction: Ras Gas bondholders over-react to news about the off-taker. The results in Table 2 show that this pattern is stable across all specifications. One possible explanation for the market's apparent overreaction to changes in the off-taker's credit spread might lie in Kepco's importance for debt service. Since most revenue comes from one single source, any deterioration in its prospects calls into question the financial viability of Ras Gas.

Regarding oil prices we find that the coefficient is marginally significant at best. Independent of the set of control variables energy prices do not seem to significantly determine Ras Gas yield spread levels and, hence, the bond's riskiness as priced in global markets. It is