European Infrastructure Finance Yearbook - Investing In Bonds ...

failure due to human error or material failure can
be a form of force majeure that may excuse a
project from its contractual obligations. Despite
excusing a project from its supply obligations, the
force majeure event may still lead to a default
depending on the severity of the mishap.
Technology, construction, and operations
In part, a project’s rating rests on the
dependability of a project’s design, construction,
and operation; if a project fails to achieve
completion or to perform as designed, many
contractual and other legal remedies may fail to
keep lenders economically whole.
The technical risk assessment falls into two
categories: construction and operations.
Construction risk relates to:
■Engineering and design
■Site plans and permits
■Construction
■Testing and commissioning
Operations risk relates to:
■Operations and maintenance (O&M)
strategy and capability
■Expansion if any contemplated
■Historical operating record, if any
Project lenders frequently may not adequately
evaluate a project’s technical risk when making an
investment decision but instead may rely on the
reputation of the construction contractor or the
project sponsor as a proxy for technical risk,
particularly when lending to unrated transactions.
The record suggests that such confidence may be
misplaced. Standard & Poor’s experience with
technology, construction, and operations risk on
more than 300 project-finance ratings indicates
that technical risk is pervasive during the pre- and
post-construction phases, while the possibility of
sponsors coming to the aid of a troubled project
is uncertain. Thus, we place considerable
importance on a project’s technical evaluation.
We rely on several assessments to complete our
technical analysis. One key element is a reputable
independent expert’s (IE) project evaluation. We
examine the IE’s report to see if it has the proper
scope to reach fundamental conclusions about the
project’s technology, construction plan, and
expected operating results, and then we determine
whether these conclusions support the sponsor’s
STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK
PROJECT FINANCE/PUBLIC-PRIVATE PARTNERSHIPS
and EPC contractor’s technical expectations. We
supplement our review of the IE’s report with
meetings with the IE and visits to the site to
inspect the project and hold discussions with the
project’s management and construction contractor
or manager. Without an IE review, Standard &
Poor’s will most likely assign a speculative-grade
debt rating to the project, regardless of whether
the project is in the pre- or post-construction
phase. Finally, we will assess the project’s
technical risk using the experience gained from
examining similar projects.
Another key assessment relates to the potential
credit effect of a major equipment failure that
could materially reduce cash flow. This analysis
goes hand-in-hand with the contractual
implications of force majeure events, described
above, and counterparty risk, described below. If
the potential credit risk from such an event is not
mitigated, then a project’s rating would be
negatively affected. Mitigation could be in the
form of business-interruption insurance, cash
reserves, and property casualty insurance. The
level of mitigation largely depends on the project
type--some types of projects, such as pipelines and
toll roads--are exposed to low outage risks and
thus could achieve favorable ratings with only
modest risk mitigation. In contrast, a
mechanically complex, site-concentrated project-such
as a refinery or bio-mass plant--can be
highly exposed to major-equipment-failure risk,
and could require robust features to deal
with potential outages that could take months
to repair.
Resource availability
All projects require feedstock to produce output,
and we undertake a detailed assessment of a
project’s ability to obtain sufficient levels. For
many projects, the input-supply risk largely hinges
on the creditworthiness of the counterparty that is
obligated to provide the feedstock, which is
discussed below under Counterparty Exposure.
Other types of projects, however, such as wind
and geothermal power, rely on the type of natural
resources of which few third parties are willing to
guarantee production. In these cases, we require
an understanding of the availability of the natural
resource throughout the debt tenor. We use
various tools to reach our conclusions, but most
important will be the analysis and conclusions of
a reputable IE or market consultant on the
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