Standard and Poor's revises project finance rating criteria

The agency is updating the methodologies it uses to assess the creditworthiness of project finance agreements generally, as well as its assumptions for the sector specific "key credit factors" that could affect various types of project. The new criteria split the stages of a project into three separate methodologies covering project finance framework, project finance transaction structure and project finance operations.

Standard and Poor's said that although its new criteria were not dramatically different, they would make its processes for awarding ratings more transparent and make the ratings themselves easier to compare. The documents supersede its current project finance criteria, published in September 2007.

The new criteria are effective immediately, and Standard and Poor's said that it would review all existing ratings within the next six months. The agency said that "about 99%" of its ratings would remain within one notch of the existing ratings: 9% could be upgraded, 5% downgraded and 85% would likely experience no change. The remaining 1% could change by two notches, it said.

According to the document, Standard and Poor's will assign a credit rating to projects that meet certain minimum requirements, regardless of whether the debt is public, confidential or privately-rated. Requirements include restrictions on the type of financing structure, which must contain contractual safeguards to protect senior creditors, a finite economic life with business activities and expansions limited to those set out in the contract, and documented responsibilities and risk allocation. The agency assigns project finance issue credit ratings to the project's senior secured debt, and can assign subordinated project finance issue credit ratings to subordinated debt if present.

The project's stand-alone credit profile (SACP), is intended to reflect the credit quality of a project during its weakest period over the remaining term of the lender's financial obligation, and until that obligation is repaid through project cash flows. In practice, this will mean that a project's overall SACP is the lower of the SACP during the construction phase or the SACP during the operations phase. In cases where the construction phase is deemed more risky, the overall project rating may be revised upwards once construction is complete and all construction-related issues resolved.

Maintenance and refurbishment activities foreseen at the outset such as road repaving, the repair or replacement of worn parts or refurbishment are typically assessed as part of the project's operating phase, according to Standard and Poor's. However, if these activities result in a "material expansion" of the project or are now construction activities, these will be assigned a separate credit rating which could affect the project's overall credit rating.

Once Standard and Poor's decides whether the project finance criteria are applicable and calculates the project's SACP and subordinated SACP, if required, it will then determine the final credit ratings. To do so, the agency will factor in any weaknesses in the transaction structure, any extraordinary timely government support and sovereign risk, and adjust for any full-credit guarantees such as those provided by insurers. It may also assign a recovery rating, reflecting the likelihood of recovery if the project defaults, to those projects assigned an overall rating of BB+ or lower.

The agency has also published key credit factors for social infrastructure, accommodation and entertainment projects; roads, bridges and tunnels; power projects; and oil and gas. These documents describe specific risks and assumptions for sectors that commonly use private finance structures.