Download Evaluating Investor Risk in Infrastructure Projects

Evaluating Investor Risk in Infrastructure Projects
Michael Wilkins
Managing Director
Infrastructure Finance
Standard & Poor’s
February 6, 2012
Mobilizing Private Investment in Low-Carbon, Climate-Resilient Infrastructure
OECD Expert Meeting - Session IV
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Copyright © 2011 Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.
Agenda
• S&P Infrastructure Ratings
• Key Issues in Infrastructure Investments
• S&P's Assessment of Regulatory Risk in Renewable Energy Projects
• S&P's Assessment of Counterparty Risk in Infrastructure Projects
• Mitigating Investors’ Risks
- Credit Enhancements
- EU Project Bond Initiative
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2.
Standard & Poor’s Infrastructure Ratings
S&P first rated project finance transactions 20 years
Ratings on power assets continue to dominate the
ago. Since then, we have issued more than 500
global ratings portfolio
ratings and currently rate more than $115 billion of
project finance debt globally
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3.
Standard & Poor’s Infrastructure Ratings Cont…
While the ratings distribution on the global portfolio
The ratings outlook distribution points to relative
has moved down the scale, the distribution of
ratings stability in the portfolio
ratings remains skewed toward investment grade
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4.
Key Issues in Infrastructure Investments
According to the findings of Standard &Poor’s & Parhelion’s Climate Finance Roundtable:
Impact
•Illegitimate Policy Changes;
•Institutional and Property
Rights;
•Enforcement Risk;
•Multitude Risk (multiple
projects in a number of countries
and/or employing multiple
technologies)
•Longevity Risk;
•Risk/Reward Imbalance;
•Transaction Cost Risk;
•Human and Operational Risk;
•Economic/Commodity
Price Volatility.
•Aggregation/
Commoditization Risk
(difficulty in aggregating and/ or
commoditizing individual
transactions into large-scale
investment vehicles).
Probability
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5.
*Longevity Risk, in which
regulations are only in
force for a short period
ompared with investors'
time horizons and capital
commitment, adversely
affecting continuity and
stability, was highlighted
by the round table
participants to be the
most severe
S&P's Assessment of Regulatory Risk in Renewable Energy Projects
A sustainable regulatory system balances the promotion of renewable energy against the costs to the government and
consumers:
• Size: We view FITs and other incentives that are
considerably above market cost to be at the
greatest risk of cutbacks, especially in times of
economic stress and budgetary controls
• Affordability: Countries in which subsidies
represent a higher proportion of GDP are the most
at risk of regulatory changes
• Control mechanisms: The absence of caps
on installed capacity allows for uncontrolled
growth, which then translates into subsidy
payments that may be too high
• Grid management: Ineffective management of
the electricity grid may increase the cost of backup energy supplies considerably
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6.
S&P's Assessment of Counterparty Risk in Infrastructure Projects
Counterparty risk results from reliance on suppliers, construction companies, operators and concession grantors
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7.
Credit Enhancement to Support Transition to a Low-Carbon Economy
Barriers for large scale low-carbon investments - small secondary debt market, absence of liquid,
investment grade asset-backed securities
Higher risk
Rating risk
BBB
A
Indicative credit rating
Project backed bonds with no
credit enhancement
Most existing project bonds fall
within this range
Private or public credit
enhancement is needed
to create project-backed
bonds with an A-rating
Source: Accenture, Barclays Capital “Carbon capital: Financing the low carbon economy”, 2011
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8.
Lower risk
AAA
Bonds backed by
government or
multilateral guarantees
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
Project Bonds
Target Rating
of A-
– Unfunded is on demand liquidity
facility
• S&P’s View:
SPV Project
Costs
– devil is in the detail but,
– It cannot make a weak project good
and
– has the capacity to enhance the debt
rating
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9.
EIB Sub Debt
Equity &
Quasi Equity
Related Criteria and Research
• Can Capital Markets Bridge The Climate Change Financing Gap?, October 4, 2011
• Credit FAQ: How Europe's Initiative to Stimulate Infrastructure Project Bond
Financing Could Affect Ratings, May 16, 2011
• Credit FAQ: Why Regulatory Risk Hinders Renewable Energy Projects In Europe,
July 5, 2011
• Industry Report Card: Infrastructure Needs Are DrivingProject Financings Around
The Globe, Oct. 28,2011
• Project Finance Construction And Operations Counterparty Methodology, Dec 20,
2011
• Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007
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10.
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