Rating Models and Validation - Oesterreichische Nationalbank

elationships in the project, these credit ratings will affect the assessment of the
project finance transaction in various ways.
One external factor which deserves attention is the country in which the
project is to be carried out. Unstable legal and political circumstances can cause
project delays and can thus result in payment difficulties. Country ratings can be
used as indicators for assessing specific countries.
During the Project
In addition to the information available at the beginning of the project, additional
data categories can be assessed during the project due to improved data
availability. At this stage, it is also possible to compare target figures with actual
data. Such comparisons can first be performed for the general progress of the
project by checking the current project status against the status scheduled in the
business plan. The results will reveal any potential dangers to the progress of the
project.
Second, assessment may also involve comparing cash flow forecasts with the
cash flows realized to date. If large deviations arise, this has to be taken into
account in credit assessment.
Another qualitative factor to be assessed is the fulfillment of specific covenants
or requirements, such as construction requirements, environmental protection
requirements and the like. Failure to fulfill these requirements can delay
or even endanger the project.
2.4.2 Object Finance
Object finance (OF) refers to a method of funding the acquisition of physical assets
(e.g. ships, aircraft, satellites, railcars, and fleets) where the repayment of the exposure
is dependent on the cash flows generated by the specific assets that have been
financed and pledged or assigned to the lender. 6 Rental or leasing agreements with
one or more contract partners can be a primary source of these cash flows.
Before the Project
In this context, the procedure to be applied is analogous to the one used for
project finance, that is, analysis should focus on expected cash flow and a simultaneous
assessment of the business plan. Expected cash flow is to be compared
to financing requirements with due attention to equity contributions and grant
funding.
The type of assets financed can serve as an indicator of the general risk
involved in the object finance transaction. Should payment difficulties arise,
the collateral value of the assets financed and the estimated resulting sale proceeds
will be decisive factors for the credit institution.
In addition to object-specific data, it is also important to review the creditworthiness
of the parties involved (e.g. by means of external ratings). One
external factor to be taken into account is the country in which the object is
to be constructed. Unstable legal and political circumstances can cause project
delays and can thus result in payment difficulties. The relevant country rating
can serve as an additional indicator in the assessment of a specific country.
6 Cf. EUROPEAN COMMISSION, draft directive on regulatory capital requirements, Annex D-1, No. 12.
Rating Models and Validation
Guidelines on Credit Risk Management 25