Fitch Refining its Approach to Cost Risk in PPP/Availability Payment Projects

NEW YORK--()--Fitch Ratings is considering revisions to its Availability Payment (A/P) criteria with heightened focus on cost volatility exposure. The revised approach is expected to focus on differentiating between projects by exposure to Operations and Maintenance (O&M) as well as Lifecycle (LC) cost increases. In Fitch's view the tight coverage ratios and long-term length of the commitments inherent in public-private partnerships (PPP) A/P transactions leave them susceptible to material changes in O&M and LC costs with history indicating LCs are more prone to cost increases. The criteria review process is the culmination of Fitch's in-depth discussions with more than a half-dozen lender's technical advisors (LTAs) in North America and Europe over the past year. Fitch continues to believe the LTAs provide a vital link between project sponsors' overall approach to a project and the investment community. There was remarkable consistency in the views of the LTAs as to the nature of the risk to these projects and the gaps in information that exist. While these discussions confirmed Fitch's views in a number of areas they also provided an enhanced understanding of the risks that helped better define the factors driving exposure to cost risk.

In order to gauge a project's overall exposure to cost risk, Fitch has identified the following areas of risk: (1) Scope Risk: identifies functional elements of work that are needed to meet the O&M and LC responsibilities under the concession agreement; (2) Cost Predictability: assesses the visibility of unit costs for components of project scope including the depth of the market, as well as the relative experience and availability of providers ; and (3) Cost Volatility Structural Protections: measures the adequacy of structural features that are inherent within the transaction to mitigate against the potential impact of unexpected cost increases.

The analysis of these three components, along with other risk factors relevant to the sector (revenue risk, debt structure) are helpful in being able to differentiate between a project's rating cases and financial metrics analysis. All else equal, projects with low exposure to cost volatility should require less coverage for a given rating while those with greater cost volatility would require additional financial margin.

Fitch expects to conclude its criteria review by the end of July and simultaneously publish a special report on cost risk with illustrative examples of how the approach will be applied.

Additional information is available at 'www.fitchratings.com'.

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Contacts

Fitch Ratings
Scott Zuchorski
Senior Director
Fitch Ratings, Inc.
33 Whitehall
New York, NY 10004
+1-212-908-0659
or
Dan Robertson
Managing Director
+44-20-3530-1312
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Scott Zuchorski
Senior Director
Fitch Ratings, Inc.
33 Whitehall
New York, NY 10004
+1-212-908-0659
or
Dan Robertson
Managing Director
+44-20-3530-1312
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com