European Infrastructure Finance Yearbook - Investing In Bonds ...

COMMENTARY
Publication Date:
Oct. 31, 2007
Primary Credit Analysts:
Lidia Polakovic,
London,
(44) 20-7176-3985
Michael Wilkins,
London,
(44) 20-7176-3528
Secondary Credit Analysts:
Arthur F Simonson,
New York,
(1) 212-438-2094
Ian Greer,
Melbourne,
(61) 3-9631-2032
Peter Rigby,
New York,
(1) 212-438-2085
Other Secondary Credit
Analysts:
Jonathan Manley,
London,
(44) 20-7176-3952
Peter Kernan,
London,
(44) 20-7176-3618
Paul B Calder, CFA,
Toronto,
(1) 416-507-2523
HOW INFRASTRUCTURE ASSETS HAVE WEATHERED A
DECADE OF STORMS
Over the past decade, Standard & Poor’s
Ratings Services has witnessed
phenomenal growth in demand for
infrastructure assets. A highly sought after asset
class in the financial markets, infrastructure
benefits from its reputation for stability and
flexibility to respond to changing investor needs.
The sector is evolving, with assets becoming more
varied and the financial structures that support
their financings increasingly sophisticated, making
risk analysis more complex than ever.
This year marks Standard & Poor’s
Infrastructure Finance Ratings group’s 10th
anniversary. It therefore seems appropriate to
review the highs and lows of the past decade, and
to consider how infrastructure has matured as an
asset class.
In 1997, infrastructure finance faced a difficult
environment. The Asian crisis was unfolding,
threatening many project and infrastructure
credits rated by Standard & Poor’s across the
region. In many cases the crisis derailed projects
at all stages of the pipeline--from many in
development infancy to a handful ready to close
on their financings. Market shocks have followed.
Notably, the California power crisis, Enron Corp.
bankruptcy, Brazilian energy crisis, and events of
Sept. 11, 2001, caused widespread disruption in
the project, utility, and transportation sectors.
Through it all, though, infrastructure assets
have shown resilience, and the market continues
to grow. This should surprise few. As the global
economy has boomed, the need for supporting
infrastructure has exploded, which has also
resulted in a significant rise in the number of
Standard & Poor’s ratings in the sector. Project
Chart 1
Breakdown Of Projects By Sector,
December 1997
4 ■ NOVEMBER 2007 STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK
finance ratings alone rose to 304 at the beginning
of 2007, from 93 in 1997. Project finance
transactions have also spread globally to markets
such as Latin America, the Middle East, and-more
recently--Eastern Europe. New forms of
project finance have gained popularity, with the
U.K. public-private partnership (PPP) market
growing in importance over the decade. This
market continues to expand, with several
countries developing their own PPP models-including
Canada, Australia, and most recently
the U.S.--as a means of delivering public sector
services using private sector expertise. Increasingly
more diverse assets are being presented to us as
infrastructure (see charts 1 and 2 below), and
infrastructure finance now includes wind and
solar power projects, as well as more unusual
asset types such as stadiums and car parks.
The Infrastructure Finance Ratings team has
followed the cycles of infrastructure finance of the
past decade and studied their causes and effects.
Here are some of the decisive moments in the
development of the infrastructure asset class.
Power Projects Hit By Falling
Commodity Prices
After the Asian financial crisis in 1997-1998, the
majority of infrastructure assets enjoyed rating
stability. This all changed in 2002, when rated
project credit quality precipitously fell. Collapsing
commodity prices drove many of the negative
credit trends. Most of the project finance
downgrades occurred in the U.S. power sector,
affecting projects exposed to contracts with
weakening power offtakers in particular. Notably,
a number of rated AES Corp. projects that sold
Chart 2
Breakdown Of Projects By Sector,
May 2007