Moody's says availability payment PPPs present lowest default risk

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Moody's says availability payment PPPs present lowest default risk

According to Moody's latest annual study, "Default and Recovery Rates for Project Finance Bank Loans, 1983-2013 Addendum", infrastructure projects with availability-based payment presents lowest default risk.

The availability payment mechanism, among others, transfers the risks of designing, building, financing, operating and maintaining a project to a private partner, and preserves string incentives for concessionaires to provide efficiency gains in the construction, operations and maintenance of a project.

Under the availability payment mechanism payments are made by a public project sponsor based on particular project milestones or facility performance standards. Project milestones can refer to the completion of the facility itself by a certain deadline, while performance standards can be measured operationally, measuring such metric as lane closures for maintenance purposes, incident management, or snow removal. Level-of-service performance could also be used as the primary payment metric for availability payment concessions involving the implementation of managed lanes.

Andrew Davison, a Moody's Senior Vice President and author of the report stated:

"The 10-year cumulative default rate for availability-based infrastructure projects worldwide is 1.3%, which is somewhat lower than the comparable 10-year cumulative defamult rate of 3.0% for corporate issuers rated single-A by Moody's. Marginal default rates, the likelihood that a performing obligor at the start of a year will default in that year, tend to decline over time from financial close which is a distinguishing characteristic compared to corporate issuers."

According to the report:

  • For availability-based projects and availability-based PPPs, marginal default rates decline over time from financial close. Marginal default rates for those projects in Europe, within the OECD region and worldwide are comparable to marginal default rates for corporate issuers rated Baa3 or higher at all durations from financial close.
  • For Broad Infrastructure project finance and PPP projects, marginal default rates also decline over time from financial close. Marginal default rates for those projects in Europe, within the OECD region and worldwide are similar to marginal default rates of border-line investment-grade corporate issuers for the first four years (two years in the case of PPP projects in Europe) following financial close, and are comparable to marginal default rates for corporate issuers rated Baa3 or higher thereafter.
  • For Broad Infrastructure project finance and PPP projects, average ultimate recovery rates are similar to the average ultimate recovery rate of 80.3% for the entire study data set. For availability-based projects and availability-based PPP projects, average ultimate recovery rates are slightly lower.

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