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IADF Conference Financing Municipalities & Sub-National Governments Washington, DC September 30, 2004. Suzanne G. Smith Director Standard & Poor’s New York Suzanne_Smith@sandp.com. Trends in Private Financing of Infrastructure. Standard & Poor’s - General Information
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IADF Conference Financing Municipalities & Sub-National GovernmentsWashington, DCSeptember 30, 2004 Suzanne G. Smith Director Standard & Poor’s New York Suzanne_Smith@sandp.com
Trends in Private Financing of Infrastructure Standard & Poor’s - General Information Infrastructure Credit Ratings - Water Public / Private Partnerships Pooled Borrowings Emerging Market Concerns
Value of a Credit Rating • Independent and Objective Analysis of Credit • Benchmarked on a Global Basis • Provides Value to All Stakeholders • Measure of Default Risk • Not a Measure of Asset Value • Not a Buy/Sell Recommendation
S&P’s Rating Scale - - - - - - - - - Extremely Strong Very Strong Strong Adequate Less Vulnerable More Vulnerable Currently Vulnerable Currently Highly Vulnerable Default AAA AA A BBB BB B CCC CC D
Offices • Affiliates • North America • Atlanta, GA (IS, CVC) • Baltimore, MD (IS) • Belmont, CA (IS) • Boca Raton, FL (IS) • Boston, MA (IS, CMS, CVC) • Centennial, CO (IS) • Charlottesville, VA (IS) • Chicago, IL (IS, CMS, CVC) • Dallas, TX (IS, CMS, CVC) • East Palo Alto, CA (CVC) • Florham Park, NJ (CVC) • Hightstown, NJ (IS, CMS) • Houston, TX (CVC) • Los Angeles, CA (IS, CVC) • New York, NY (IS, CMS, CVC) • Novi, MI (CVC) • Philadelphia, PA (CVC) • San Francisco, CA (IS, CMS, CVC) • Toronto, Canada (IS, CMS) • Urbandale, IA (IS) • Washington, D.C. (CMS) • Latin America • Buenos Aires (IS, CMS) • Santiago, Chile • São Paulo (IS, CMS) • Mexico City (IS, CMS) Standard & Poor’s Locations • Europe • Amsterdam (CVC) • Frankfurt (IS, CMS) • Hammersmith (IS) • Hofheim (IS) • Ipswich (IS) • London (IS, CMS, CVC) • Luxembourg (IS) • Madrid (IS, CMS) • Milan (CMS) • Moscow (CMS) • Paris (IS, CMS) • Stockholm (CMS) • Asia • Hong Kong (IS, CMS) • Jakarta, Indonesia • Manila, Philippines • Mumbai, India • Seoul (CMS) • Singapore (IS, CMS) • Taipei, Taiwan* • Tel Aviv, Israel • Tokyo (IS, CMS) *50% Owned Affiliate. • Australia • Melbourne (IS, CMS) • Sydney (IS, CMS)
Infrastructure Ratings : Water • Corporate Credit Ratings • Majority of the ratings are in the United States, U.K. and Australia. • France, Italy, Spain, Brazil, and South Africa each have one rated entity. • US, UK and France are privately-owned, elsewhere, government owns majority. • All are Investment Grade except for Companhia de Saneamento Basico do Estado de Sao Paulo in Brazil. • Most of the ratings have a stable outlook. Public Finance Ratings • Vast majority of the rated entities are in the United States. • Approximately 350 municipal water ratings • 80% are rated A, AA or AAA. • Rating outlooks are mostly stable.
Infrastructure Ratings: Water Emerging Markets Ratings for Water Services • SABEP (Brazil) and Rand Water (South Africa) • Privatization and Granting of Concessions • Aguas Argentina – default • Slow to Develop and Controversial • Reasons for Few Ratings • Water Sector Fragmented • Small Sized Systems with no Economies of Scale • Regulatory Development Not Ready • Cost Recovery Less than 100% • Potential Still Exists- essential service, natural monopoly, low technology risk
Public/Private Partnerships • Definition: Any medium to long term relationship between the public and private sectors involving the sharing of risks and rewards of skills, services, expertise, and finance to deliver desired policy outcomes. • Used for hospitals, roads, prisons, schools, airports, water treatment and waste disposal and treatment. • Gaining popularity in U.K, (over 600 projects) Canada, and Australia., but spreading more slowly elsewhere. • Near Term Potential in Spain, Portugal, Italy, and South Africa.
Public/Private Partnerships • Salient Features • Similar to Risk Allocation Principles of Project Finance • Establishment of a Special Purpose Entity (SPE) • Pubic entity enters into a concession agreement • Requires Effective Risk Analysis and Risk Transfer • Must have good legal, financial and contractual structures • Can Assume Volume Risk or Not • Credit Ratings • 10% of transactions in UK have S&P credit ratings • Ratings distribution clusters around BBB, some BB. • Canadian ratings all in A category or above for senior debt.
Public/Private Partnerships • Benefits to the Government • Introduction of private sector efficiencies into public service • Meaningful Risk Transfer • Alternative Capital Asset procurement methods • Costs to the Government • Liability Still Remains • Some Projects provide few benefits • Moral Obligation to Support
Public/Private Partnerships • Experience To Date/Lessons Learned • In Australia, some projects have experienced operational problems – revenue shortfalls, poor service quality, problems with financial viability of operators. • In UK, experience shows that there must be clearly defined procedures for replacing contractors or operators without causing bonds to default. • All projects have some impact on states’ creditworthiness, but varies from project to project. • Works best for essential services, where rate setting mechanisms are clear, strong government support, qualified operator, soundly structured debt. • Recently, first securitization of UK PPP loans has been completed and rated by • Standard & Poor’s.
Pooled Borrowings • Popular and Well-Established in United States and Canada • Benefits include lower cost of funding, some financial discipline • Standard & Poor’s developed criteria for rating U.S. State Revolving Funds in 1990 and refined the criteria in 1994. • Criteria focuses on the likelihood that a single obligor will cause a bond pool to default. Probability that an obligor will cause a default depends on the obligors’ credit quality and the influence of that obligor on the total performance of the pool (level of diversity and concentration).
Pooled Borrowings • Credit quality primarily linked to the underlying credit quality of loan obligors – credit enhancement can provide incremental support • General obligation rating of the municipal or province is a reference point • Differences in obligor diversification and credit quality of borrowers. Fewer than 10 obligors means a “weak link” approach is necessary • Wide range of different types of credit enhancement – reserve funds, tax base access, legislative provisions • Examples: Ontario School Boards Financing Corp • Ontario Municipal Economic Infrastructure Authority
Emerging Markets Concerns • Risks and Barriers to Financing • Currency Risk of Cross-Border Borrowing • Higher Institutional Risks • Legal • Regulatory • Other • Level of Sovereign Rating • Mitigants • Greater Use of Domestic Capital Markets • National Scale Ratings • Use of S&P Global Ratings for Selected Transactions and Local and Government Ratings
Standard & Poor’s Website • Our website, www.standardandpoors.com, operates on a global platform and offers regional and local language selections in English, German, French, Spanish, Portuguese, Japanese and Russian. • Real-time ratings, commentaries, press releases, reports, index changes, updates and the entire S&P universe are just a click away.