CHICAGO--(BUSINESS WIRE)--Merchant projects offer sponsors an opportunity to capture upside revenue potential while optimizing the debt structure to maximize equity returns, according to a new Fitch Ratings report. Fitch comprehensively evaluates merchant sales risk with a forward-looking analytical approach based on a project's competitive and strategic position.
Fitch views a project as 'merchant' if some or all of its output, such as electricity or petroleum products, is sold at prevailing prices in the wholesale market. As such, Fitch's analysis of merchant projects takes into account the historically volatile commodity markets and the cyclical nature of the broader economy.
'Fitch expects merchant projects to demonstrate lower total leverage compared with fully contracted peers for any given rating level,' said Christopher Joassin, Director. 'Merchant projects, however, may receive a more favorable assessment of credit quality with reduced debt levels and ample structural safeguards.'
Due to the high-risk, high-return nature of merchant projects, attaining an investment grade rating is often difficult. That said, merchant projects that act as price takers in established commodity markets can achieve 'BB' ratings or higher. Materially higher investment-grade ratings are possible if a project benefits from an exceptionally strong competitive advantage. Conversely, merchant projects that participate in developing markets or exhibit volatile commodity input prices may be constrained to the 'B' rating category.
One example of a project exposed to price risk that demonstrates stronger credit attributes is Ras Laffan Liquefied Natural Gas Company Limited (RasGas; rated 'A+' with a Stable Outlook by Fitch). The credit quality of RasGas reflects the project's exceptionally high financial flexibility derived from its strong competitive position. In contrast, escalating fuel costs combined with lower electricity prices to drastically reduce cash flows at AES Eastern Energy LP. Ultimately, merchant sales could not support the high level of leverage and the project filed for Chapter 11 bankruptcy.
Fitch's analytical approach to merchant projects is further detailed in the full special report, 'Evaluating Merchant Exposure in Project Finance', which is available at 'www.fitchratings.com' or by clicking on the above link.
Additional information is available at www.fitchratings.com.
Evaluating Merchant Exposure in Project Finance (A Measured Approach)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869128
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