Project Finance Structure Methodology: What?s Behind Our Re

On Nov. 17, 2011, Standard & Poor’s published its request for comment concerning project finance structure methodology. What’s prompting our request? In this CreditMatters TV segment, Ian Greer, global analytical coordinator for Project Finance and Infrastructure, provides a broad overview of our project finance methodology. Topics include transparency and consistency, transaction structure, criteria components, and the potential impact on ratings.

Hi my name is daniel antman i’m the head of market development in the pacific region for standard & poor’s i’m joined today by ian griha our global analytical coordinator for project finance and infrastructure and ian is going to discuss with us today a little bit about the recent request for comment that went out in relation to project finance structures

Methodology and welcome bags down and on the 18th of november standard & poor’s released its request the comment can you tell us a little bit about the reasoning behind it and a little bit of the detail in relation to the rfc sure down yep first of all standard & poor’s regularly revises criteria what we’re now doing is increasing the transparency and the

Consistency across all ratings so in august of this year we published an advance notice that we’re reviewing our entire project finance criteria at the same time we published in august a request for comment the construction and operations counterparty methodology that was the reversed rfc the second component of our review is the one we’ve just published the rfc

For transaction structure methodology and following that we’re now going to review the overall framework and the operations and construction phase methodology and so all of those components will come together and collectively they work as a package which will be our new project plans methodology and you’ve mentioned the term transaction structure a few times can

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You tell us a little bit about what you mean by transaction structure first of all project financing is a series of companies which we call limited purpose entities and basic limited purpose means that they carry out a limited purpose of running the project to project finance they carry out the construction and the operation of the project and it can be one company

Or a number of companies and collectively we call those the project the transaction structure looks at these companies should be independent bankruptcy remote and they should be restricted just to running the project finance the second component of the transaction structure is they should have a first ranking security so these companies have a first ranking security

Over project itself the third component is a number of covenants which we are going to call limited purpose entity covenants basically these covenants are similar to the structured finance special purpose entity covenants and then cover things as additional debt tests limits on additional security etc so those will together from a series of covenants about running

The company and the final component of the transaction structure is we call the cash management covenant structure and that is a series of things that looks at a cash flow waterfall the priority in which you pay out payments from the project reserve accounts distribution tests and the similar end can you give us a bit of a breakdown or a bit of an analysis of what

The criteria actually is sure then the first thing is project financing means different things to different players in the market so what we’re doing as the first part of the criteria is to determine what components do we think a transaction structure has in order to be called project finance under our criteria so the first part of the criteria will say you need

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To have these components if you do you can be analyzed under this criteria if you don’t then you’ll be analyzed under another type of criteria the second component of the analysis looks at the transaction structure and says what structural protections does this provide to investors in the project such that they will be limited to the risk within the project and

These kinds of things look at the limits on additional debt limits on what the company can do and what we’re going to do with those particular parts is we’re going to link those back to the framework so for example if you have a distribution test that distribution test will be linked into our financial analysis in the framework the third component of the criteria

Is going to look at the protection from the parent so as a special purpose company that’s bankruptcy remote we’re concerned that if the parent becomes bankrupt what will that mean for the project itself so we’re going to use this analysis of the transaction structure to what kind of separation from parent do we have and this analysis will feed again into the future

Criteria and will together with the legal jurisdiction inform us about what sort of separation we can have between a parent’s rating and the project rating well in criteria is one thing what about the impact on ratings yeah look we really don’t expect many changes as part of this criteria for the first reason is we’re really restating what we do now so transaction

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Structure special purpose covenants all of those things are really existing criteria so we’re now just flashing those out and providing a little bit more transparency in how we do it the second reason is that this transaction structure will form part of the major methodology and before we produce the rest of the methodology we’ll put that out for a request for

Comment so people will be able to see how the various components work together and finally how do listeners get a copy of the rfc paper then the rfc is posted on standard & poor’s com and if listeners go to the website they look at the ratings tab go on to the ratings tab and look at the left hand side there’s actions and criteria the rfc will be one of the

Last postings under that tab when they read the rfc in paragraph 11 there’s an email address so we’d like any comments on the rfc to be sent to that email address the rfc lists the number of questions where require requesting comments to and the deadline for responses is the twentieth of december thanks very much ian thanks for joining us today that was ian griha

Our global coordinator for project finance and infrastructure ratings as ian mentioned if you do want a copy of the rfc you can get it from ww standard & poor’s com where we also have a vast array of other videos which you may want to view thank you for watching i’m daniel antman from standard boards market development group good day

Transcribed from video
Project Finance Structure Methodology: What?s Behind Our Re By S\u0026P Global Ratings