European Infrastructure Finance Yearbook - Investing In Bonds ...

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PROJECT FINANCE/PUBLIC-PRIVATE PARTNERSHIPS 104 ■ NOVEMBER 2007 and their advisors will continue to develop new project structures and techniques to mitigate the growing list of risks and financing challenges. As investors and sponsors return to emerging markets, particularly as infrastructure investment needs increase, project debt will remain a key source of long-term financings. Moreover, as the march toward privatization and deregulation continues in markets, nonrecourse debt will likely continue to help fund these changes. Standard & Poor’s framework of project risk analysis anticipates the problems of analyzing these new opportunities, in both capital-debt and bank-loan markets. The framework draws on Standard & Poor’s experience in developed and emerging markets and in many sectors of the economy. Hence, the framework is broad enough to address the risks in most sectors that expect to use project-finance debt, and to provide investors with a basis with which to compare and contrast project risk. ■ STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK
Publication Date: Sept. 5, 2007 Primary Credit Analyst: Paul B Calder, CFA, Toronto, (1) 416-507-2523 Secondary Credit Analysts: Kurt Forsgren, Boston, (1) 617-530-8308 Ian Greer, Melbourne, (61) 3-9631-2032 Lidia Polakovic, London, (44) 20-7176-3985 Additional Contact: Santiago Carniado, Mexico City, (52) 55-5081-4413 Overview Since the groundbreaking Chicago Skyway transaction in late 2004 (Skyway Concession Company LLC), Standard & Poor’s Ratings Services has observed rapid growth globally in accreting debt and swap structures applied to project finance infrastructure transactions. Infrastructure is one of the hottest asset classes, with private and public pension fund equity and various long-term debt providers significantly funding long-term concessions or infrastructureasset purchases. In some transactions we have observed, accreting debt and swap structures have facilitated significant acquisition premiums (or refinancing gains). This is because accreting debt allows the partial deferral of interest payments to reduce debt service early in the concession or provides an additional non-operating source of funds to the project in the form of payments from an accreting swap early in a concession. The cash flow effects of a deferral of interest payments or the addition of swap inflows to operating revenue results in overstated debt service coverage ratios (DSCRs) that, in turn, allow for the tailoring of debt service to meet a project’s early-year cash flow deficiency and, in many instances, early outflows in the form of equity distributions. Without these structural features, a highly leveraged project’s net cash flows available to service debt early in the concession would not meet debt service obligations under a traditional amortizing or even interest-only debt service profile. Simple economics of numerous global capital pools pursuing a limited number of concessions or acquisition targets results in predictably high valuation multiples, boosted by financial structures that front-load dividends and returns to equity while risk for debt holders lies toward the end of a concession. As a result, metrics such as enterprise value-to-EBITDA and debt-to-EBITDA, on a current and pro forma basis, have become increasingly aggressive in a relatively short period while investors still assume these to be investment grade structures. Given that business risk has not shifted, this could be a challenging assumption. Moreover, the acquisition multiples are considerably higher for many infrastructure financings than investment-grade M&A transactions in other sectors. In the near term, the STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK PROJECT FINANCE/PUBLIC-PRIVATE PARTNERSHIPS CREDIT FAQ: ACCRETING DEBT OBLIGATIONS AND THE ROAD TO INVESTMENT GRADE FOR INFRASTRUCTURE CONCESSIONS recent shift to conservatism in credit sentiment by lenders (as demonstrated by stricter covenant requirements, tighter loan underwriting standards, less aggressive structures etc.), together with a rise in nominal interest rates, could curb the fairly aggressive debt financing structures observed in many recent long-term infrastructure concessions and acquisitions. In the long term, we expect infrastructure assets to maintain their appeal given generally solid business positions and ability to leverage relatively stable cash flows through long-dated concessions--permitting long-term debt maturities. This report follows “Credit FAQ: Assessing The Credit Quality Of Highly Leveraged Deep-Future Toll-Road Concessions” and “Global Infrastructure Assets And Highly Leveraged Concessions Raise New Rating Considerations.” This article expands upon topics addressed in the previous reports and provides analytical insight to our approach in evaluating accreting debt within project finance transactions. Overall, Standard & Poor’s believes that infrastructure financings for long-term concessions capitalized with accreting debt can achieve investment-grade ratings; however, there are several key factors that will differentiate--in combination with the assets under consideration-investment-grade structures from those exhibiting speculative-grade characteristics. In particular, at the investment-grade level, we place greater emphasis on distribution test multiples, potential cash lock-ups and sweeps, examining the percentage of accretion relative to total debt at transaction inception--with little-to-none for short-term concessions (for example, 20-35 years), limits to additional indebtedness, and emphasize the risk/reward allocation between sponsors and lenders. Question 1: Does accreting debt increase the probability of default for an infrastructure project? Yes and no. In the early years of an accreting debt structure, the probability of default is lower compared with that of a traditional amortizing structure, as the debt service is artificially low. However, towards the middle and end of the concession, when higher accreted debt balances amortize or when bullet payments are due as the NOVEMBER 2007 ■ 105
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November 2007 Infrastructure Financ
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CONTENTS Introduction STANDARD & PO
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INTRODUCTION 2007: New Challenges A
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ject Finance Rating Distribution: I
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COMMENTARY Publication Date: Sept.
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(Bil. ) 140 120 100 80 60 40 20 0 F
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UTILITIES EUROPEAN UTILITIES Once a
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UTILITIES approach to ownership unb
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UTILITIES 18 ■ NOVEMBER 2007 Limi
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UTILITIES Publication Date: Aug. 29
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UTILITIES Publication Date: Nov. 12
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UTILITIES Publication Date: Sept. 3
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UTILITIES Publication Date: Aug. 17
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UTILITIES Publication Date: Sept. 3
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UTILITIES 50 ■ NOVEMBER 2007 stro
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Page 56 and 57: TRANSPORTATION INFRASTRUCTURE 54
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Page 148 and 149: RATINGS LIST Transportation Infrast
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Page 152 and 153: CONTACTS KEY ANALYTICAL CONTACTS Fr
Page 154: ARGENTINA AUSTRALIA BRAZIL CANADA C
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