NEW YORK--(BUSINESS WIRE)--Fitch Ratings has published an Exposure Draft of its Rating Criteria for Availability Payment (A/P) based projects (the Exposure Draft), which is an update to A/P criteria published in June 2013. The revised approach has a heightened focus on potential cost volatility and establishes a framework for differentiating between projects based on exposure to Operations and Maintenance (O&M) as well as Lifecycle (LC) cost increases.
The Exposure Draft outlines the attributes that Fitch considers consistent with the assessment (stronger, midrange, weaker) of a typical availability-based project. It provides both qualitative and quantitative guidance for the assessment of the project. Investment-grade ratings are typically associated with transactions displaying predominantly stronger or midrange attributes could be rated in the 'BBB' category with rating case debt service coverage ratios of between 1.10x-1.25x while a project with midrange characteristics could be rated in the 'BBB' category with coverage ratios between 1.15x-1.30x. The report also indicates that other risk factors may constrain the rating, such as weak contractual arrangements during construction, the inexperience of the operator on a more complex project, or a grantor of weak financial standing.
With regards to cost risk, the Exposure Draft identifies the following areas of risk which will be used to develop an overall cost assessment for the project: (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. Minimum debt service coverage requirements to achieve a given rating level will vary depending upon Fitch's assessment of the project's exposure to cost risk.
In addition, the Exposure Draft introduces the concept of the Realistic Outside Cost (the 'ROC') estimate which is essentially the magnitude by which all costs (O&M, LC, SPV and insurance) could reasonably exceed initial projections. Fitch will look to the Technical Advisors (TAs) to identify the ROC as a realistic, but unlikely, cost over-run scenario based on experience with projects utilizing similar approaches and technology. Fitch will use the ROC as an input to develop an appropriate rating case for each project.
The proposed changes, if enacted, are expected to result in some upward rating migration for a number of Availability Payment transactions in Fitch's rated portfolio. That will be determined by further analysis which will be performed when any final criteria is applied to all ratings. After the comment period and upon the publication of the new criteria, Fitch expects to place affected transactions on Rating Watch Positive or Negative, as the case may be. Fitch would then conduct full rating reviews for those transactions utilizing the new criteria.
Fitch invites feedback from market participants on the proposed criteria. Comments should be sent to email@example.com by July 16, 2015.
In accordance with regulatory requirements, at the end of this period Fitch will publish the results of the consultation. Fitch will then publish the final criteria.
Additional information is available at 'www.fitchratings.com'.
Exposure Draft: Rating Criteria for Availability-Based Projects