European Infrastructure Finance Yearbook - Investing In Bonds ...

PROJECT FINANCE/PUBLIC-PRIVATE PARTNERSHIPS
114 ■ NOVEMBER 2007
Question 12: Is the documentary and legal
review for an accreting debt or swap structure
different from other project finance or
PPP ratings?
No. The legal review across project structures is
comparable, and Standard & Poor’s expects that
transactions using accreting debt will have a
robust legal structure. Our documentation and
legal review includes a detailed examination of
the concession agreement terms, and its
supporting schedules and appendices, which
govern the long-term relationship and risk
allocation between the concessionaire and
the concession grantor. Standard & Poor’s
legal review will also examine any proposed
intercreditor agreement and the
covenant package.
Certain jurisdictions benefit from more creditorfriendly
legal regimes that can contribute to
infrastructure project rating differences.
Infrastructure project financings are generally
more susceptible to local law exposure than other
types of structured financing because of the
physical location of the assets and the often
essential and politically sensitive nature of the
assets. For more information, see “Jurisdiction
Matters For Secured Creditors In Insolvency” and
“Emerging Market Infrastructure: How Shifting
Rules Can Stymie Private Equity.”
Question 13: Beyond the already stated effects of
accretion, how does Standard & Poor’s evaluate
swap transactions as part of its credit analysis?
Many project sponsors employ interest rate or
currency swap strategies to achieve cost-effective
debt financing. These swaps are generally
integrated into an overall swap that includes
accretion features.
A capital structure that includes both debt and
accreting swaps will require a review of the
relevant swap documentation and inter-creditor
agreement. As an accreting swap counterparty is
allowing a portion of the project company’s
interest payable under its swap arrangement to
accrue, it is acting as debt provider, and these
swap obligations will likely be considered pari
passu with other debt obligations. It is important
to determine if there are cross default provisions
on events, such as early swap termination, which
could lead to acceleration of the debt obligations.
One potential credit issue is whether or not the
STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK
transaction is swap-independent. For example, if
the swap were to terminate, the issuer would pay
or receive a payment to or from the swap
counterparty. If the issuer did not receive a
payment due to a counterparty default, it might
not be able to replace its swap position at similar
rates or terms, so might not be able to
perform at previously expected (rated) coverage
levels without rate increases or possible
rating implications.
For transactions originating in the U.S. with
U.S. swap counterparties, Standard & Poor’s
might undertake a debt derivative profile (DDP)
exercise. Although we consider many factors, the
DDP scores principally indicate an issuer’s
potential financial loss from over-the-counter debt
derivatives (swaps, caps, and collars) due to
collateralization of a transaction or, worse, early
termination resulting from credit or economic
reasons. We integrate DDPs into rating analyses
for swap-independent issuers, and they are one of
many financial rating factors.
These credit issues are central to our rating
analysis as monoline bond insurance policies
might guarantee swap payments due from (but
not due to) the issuer. As a highly rated financial
guaranty policy should maintain payments to the
swap counterparty (should a wrapped project not
be able to meet its swap and debt obligations due
to poor performance), the project company
should not be in default on its side of the swap.
Swap renewal, if applicable, and swap
counterparty credit quality remain analytical
issues, even for monoline wrapped transactions.
As a result, Standard & Poor’s will examine
within a swap transaction the level and minimum
credit quality of collateral posting, and
replacement requirements should minimum credit
rating levels be violated by swap counterparties.
Question 14: Given the commitments of
monoline bond insurers, how is refinancing risk
factored into the credit rating for an accreting
debt structure?
A monoline insurer that provides a guarantee
policy for refinancings reduces the market access
risk and the spread risk at refinance. Even ‘AAA’
interest rates and credit spreads vary and in the
absence of a hedging strategy, the uncertain future
cost of debt refunding could narrow coverage
ratios in a stress case. We evaluate the underlying