European Infrastructure Finance Yearbook - Investing In Bonds ...

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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
credit quality of a transaction before overlaying and assessing the incremental contribution of credit substitutions such as monoline wraps. Moreover, our view of refinancing risk depends in large part on the expected cash flows of the project at the time of refinancing. Our starting point is to assume that refinancing risk within an accreting debt structure is manageable in long-dated concessions with a sufficient tail (about 10-30 years). We will examine financial models to understand the assumptions being made about refinancing (such as the interest rate employed) and stress tests will be used to evaluate the sensitivity of transactions to less-favorable interest rate assumptions at refinancing points. The history, record and expectation of local debt markets will have a different weight on emerging markets. Investment-grade structures will typically have secured appropriate hedging arrangements in this regard. A monoline insurer’s commitment simply gives additional comfort to any refinancing risk analysis. ■ STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK PROJECT FINANCE/PUBLIC-PRIVATE PARTNERSHIPS NOVEMBER 2007 ■ 115
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CONTENTS Introduction STANDARD & PO
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INTRODUCTION 2007: New Challenges A
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COMMENTARY Publication Date: Sept.
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UTILITIES EUROPEAN UTILITIES Once a
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