NEW YORK--(BUSINESS WIRE)--Link to Fitch Ratings' Report: Zero Flow Debt Structures in Latin America (Increased Liquidity Decreased Default Risk)
In Latin America, zero flow deals offer maximum protection, but the structure poses other challenges, according to a Fitch Ratings report.
'While the benefits of zero flow structures are clear from a credit perspective, the structures pose challenges from an investor perspective. For example, the principal repayment schedule can differ drastically from initial projections depending on project performance,' said Astra Castillo, Director in Fitch's Latin America Project Finance Group.
'Additionally, there is an inverse relationship between how quickly principal is repaid and how quickly investors would like to be repaid. Projects that perform better than expected repay principal quickly, while investors' exposure to weaker projects is extended.'
Zero flow debt structures offer maximum credit protection by preserving all project cash flows to pay debt out on a pass through basis. Distributions to equity holders are specifically prohibited prior to full debt repayment.
In Latin America, zero flow structures frequently include flexibility in the terms of repayment by allocating all excess funds to principal, but including a minimum scheduled principal amount or, more often, eliminating scheduled principal and making all principal due at the final maturity. This flexibility significantly reduces the probability of default by simultaneously minimizing the required principal and maximizing total principal repaid.
Since 2011, zero flow debt issuance in Fitch's portfolio has evolved from being primarily flow zero for all debt classes to frequently including only a subordinate zero flow tranche. This trend likely reflects growing comfort among investors in the region and possibly a greater preference for predictable cash flows.
For more information, a special report titled 'Zero Flow Debt Structures in Latin America' is available on the Fitch Ratings web site at www.fitchratings.com.
Additional information is available at 'www.fitchratings.com'.