1 / 17

Making Water Projects Bankable Key Rating Criteria

Making Water Projects Bankable Key Rating Criteria. Gersan R. Zurita Senior Director - Global Project Finance Washington, DC – 1 October 2004. Role of International Rating Agencies. What is a rating?

holiday
Download Presentation

Making Water Projects Bankable Key Rating Criteria

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Making Water Projects BankableKey Rating Criteria Gersan R. Zurita Senior Director - Global Project Finance Washington, DC – 1 October 2004

  2. Role of International Rating Agencies What is a rating? • Relative indicator (opinion) of an entity’s ability and willingness to timely pay financial obligations • What is the probability that a debtor will default? What is the probability that the creditors will recover principal? What a rating is not • Ratings are not recommendations to invest; are not opinions on the effectiveness of governmental plans; are not financial audits • Ratings do not speculate on market risk: security pricing, interest rate volatility, rollover risk, event risk, etc.

  3. Rating Criteria for Water Projects Will address the following: • Exchange rate risk • likelihood of significant currency devaluation • a mismatch in the currency of the source of debt repayment and the debt service? • Currency transfer risk • restrictions and disruptions in international flow of funds

  4. Rating Criteria for Water Projects • Political and policy risk • notions of insurrections, expropriation of property, rate-payer revolts • Change in policy/political priorities • Economic risk • macroeconomic and regional variables such as recessions, changes in income, employment, industrial diversity, etc.

  5. Fitch’s “10Cs” of Water and Wastewater Bond Analysis • Community Characteristics (Service Area) Economic diversity Income and property wealth levels Population growth Potential for residential, commercial, or industrial sector volatility, including customer concentration • Customer Base Stability, growth, or decline Effect on the capital program, rates, financial flexibility Dependence on fees derived from customer growth

  6. Fitch’s “10Cs” of Water and Wastewater Bond Analysis 3. Capacity Water supply sources Treatment facilities Collection, transmission, and distribution infrastructure Management, technological, and personnel capacity • Compliance with Environmental Laws and Regulations Is the agency/project in compliance? What new regulations could affect the project? What impact could regulations have on revenues?

  7. Fitch’s “10Cs” of Water and Wastewater Bond Analysis • Capital Demands and Debt Costs of growth, regulations and maintenance Impact of costs on rates Cost effects on financial flexibility Pay-as-you-go versus debt funding • Coverage and Financial Performance Reasonableness of future budget assumptions Payment enforcement and account delinquencies Cause of past financial volatility, if any

  8. Fitch’s “10Cs” of Water and Wastewater Bond Analysis 7. Cash and Balance Sheet Considerations (or credit enhancement factors?) Financial cushion Operating reserve Repair and replacement reserve Rate stabilization reserve Debt service reserve Unrestricted cash and investments

  9. Fitch’s “10Cs” of Water and Wastewater Bond Analysis 8. Covenants Annual coverage Regular excess coverage? Likely to continue? Minimum credit protections 9. Charges and Rate Affordability Are rates adjusted appropriately? Are rates affordable? Regional comparisons

  10. Fitch’s “10Cs” of Water and Wastewater Bond Analysis 10. Crew (Management) Links all other rating factors together Are management practices institutionalized? Have management and administrative practices withstood periods of operating volatility, if any?

  11. How to Address Barriers to Infrastructure Finance Implement legal and regulatory reforms Select projects that fit economic development priorities Select projects with strong economic value Consider corporatization of public service enterprises prior to privatization Endow projects with sufficient financial protections to mitigate risks (cash and balance sheet considerations?) Clarify the relationship between the regional / local governments and public service utility or authority

  12. Common Myths Concerning Infrastructure Finance Myth 1: “The financing documents are bullet proof” Myth 2: “It is a special purpose entity” Myth 3: “There is a government guarantee” Myth 4: “The trustee controls the money”

  13. Myth 4: “There is a government guarantee” Government guarantee vs. government credit risk General obligation vs. something else Logic of pledge

  14. Myth 4: “There is a government guarantee” Considerations: Automatic or subject to budgetary appropriation Priority of payment with respect to other government obligations Mechanism that triggers the guarantee (proactive vs. reactive) Notification process (role of trustee and guarantee)

  15. Myth 4: “There is a government guarantee” Process & timing to evaluate and settle upon guarantee (closed ended vs. open ended) Financial sustainability of guarantee commitment Political risk inherent with each individual project

  16. Related Fitch Research Public-Private Partnerships: The Next Generation of Infrastructure Finance, 6 August 2004 (also available in Spanish) PPP-PFI: UK Market Trends and Fitch Rating Criteria for European PPP Transactions, 13 May 2003 International Rating Methodology for Regional and Local Governments, 4 April 2002 Secure Credit on Tap, Municipal Water/Sewer Ratings Move Upward, 7 June 2000

More Related