Evaluating Sovereign Risk in Infrastructure Projects

Transcription

1 Evaluating Sovereign Risk in Infrastructure Projects 5 th Annual Meeting of OECD PPP Officials Paris, March 2012 Jonathan Manley Managing Director Infrastructure Finance Standard & Poor s March 26, 2012 Copyright 2011 Standard & Poor s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.

2 Agenda S&P Infrastructure Ratings Sovereign Credit Quality and Projects Criteria T&C and Sovereign Ratings in the EU New Concerns and Opportunities S&P's Assessment of Counterparty Risk in Infrastructure Projects Mitigating Investors Risks - Credit Enhancements - EU Project Bond Initiative 2.

3 Standard & Poor s Infrastructure Ratings S&P first rated project finance transactions 20 years ago. Since then, we have issued more than 500 ratings and currently rate more than $115 billion of project finance debt globally Ratings on power assets continue to dominate the global ratings portfolio 3.

4 Standard & Poor s Infrastructure Ratings Cont While the ratings distribution on the global portfolio has moved down the scale, the distribution of ratings remains skewed toward investment grade The ratings outlook distribution points to relative ratings stability in the portfolio 4.

5 Sovereign Credit Quality and Projects Standard & Poor s Criteria Sovereign credit quality plays a key role in determining project ratings The Transfer and Convertibility (T&C) Assessment of a Sovereign Is Generally a Cap to a Project s Rating This may result in the project being rated higher than the Sovereign s Foreign currency rating if the project s characteristics support it However, there maybe cases where a project s debt issue rating could be higher than the T&C based on the transaction structure such as a via offshore structuring or a guarantee Sovereign LC/FC T&C Project LC/FC Potential Project Debt Rating Potential Project Debt Rating With Structure Wastewater Plant A-/BBB A BB/BB BB Higher than BB Strong Wastewater Plant A-/BBB A BBB/BBB BBB Higher than BBB LNG Plant A-/BBB A A-/BBB A-/BBB Higher than A- /BBB Strong LNG Plant A-/BBB A A-/A- A Higher than A 5.

6 Sovereign Credit Quality and Projects T&C and Sovereign Ratings in the EU Sample Sovereign Ratings Long Term Rating (as at 23/3/12) Transfer & Convertibility Assessment U.K AAA//Stable AAA Federal Republic of Germany AAA/Stable AAA Republic of France AA+/Negative AAA Kingdom of Spain A/Negative AAA Republic of Italy BBB+/Negative AAA State of The Netherlands AA/Negative AAA Republic of Ireland BBB+/Negative AAA Hungary BB+/Negative BBB Republic of Portugal BB/Negative AAA Hellenic Republic of Greece SD AAA 6.

7 Sovereign Credit Quality and Projects New Concerns and Opportunities Counterparty Credit Quality Evolving Sovereign, Sub-Sovereign Interface Risk in Existing Projects Review of value for money of proposed projects and uncertainty over financing availability including market access But also effective means of financing Infrastructure development 7.

8 S&P's Assessment of Counterparty Risk in Infrastructure Projects Counterparty risk results from reliance on suppliers, construction companies, operators and concession grantors 8.

9 Project Finance Ratings Hold Up Well Though the Crisis Project finance ratings have generally performed well through the crisis Structured protections in the transactions and mainly availability based revenue streams The essentiality of PPP financings make them somewhat counter cyclical resilience in this product class. Our database is small, but points to better default performance and higher recovery prospects on default than corporate ratings 9.

10 The Infrastructure Funding Challenge Bridging the Gap Demand for infrastructure is strong but the supply side is absent Investor sentiment to infrastructure remains broadly positive, given the track record of credit stability and long dated nature EMEA Market needs to bridge from the current BBB Category ratings To achieving ratings in the A Category to potentially meet this demand 10.

11 EU Project Bond Initiative Moving the Market Forward? EU Project Bond Proposal Funded or Unfunded Sub-debt for up to 20% of the Total Project Debt issuance financed by the European Investment Bank EU Project Bond Proposal Funded or Unfunded Sub-Debt for up to 20% of the total debt issue used in conjunction with bond or bank debt Funded is permanent sub-debt loan day one Unfunded is on demand liquidity facility S&P s View: devil is in the detail but, It cannot make a weak project good and has the capacity to enhance the debt rating SPV Project Costs Project Bonds Target Rating of A- EIB Sub Debt Equity & Quasi Equity 11.

12 Related Criteria and Research Credit FAQ: How Europe's Initiative to Stimulate Infrastructure Project Bond Financing Could Affect Ratings, May 16, 2011 Industry Report Card: Infrastructure Needs Are Driving Project Financings Around The Globe, Oct. 28,2011 Project Finance Construction And Operations Counterparty Methodology, Dec 20, 2011 Default Study: Project Finance Default and Recovery Trends Around the World, Oct 28, 2011 Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007 Sovereign Ratings and Country T&C Assessments, March 16, 2012 Nonsovereign Ratings that Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14,

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