NEW YORK--(BUSINESS WIRE)--Fitch Ratings has published final criteria outlining the agency's global approach to rating the obligation of a public sector grantor under a concession, lease or other agreement used to support a public private partnership (PPP) financing for public infrastructure assets. Public sector counterparties considered in the criteria are sovereign, state, provincial, regional and local governments, departments and agencies thereof, as well as public sector entities.
This is the first stand-alone criteria that Fitch has published on its approach to assessing the credit quality of public sector counterparty obligations in PPP transactions. Such ratings are an input in the rating process for PPP transactions. To date, counterparty assessments have been done using more general tax-supported criteria.
Fitch released an exposure draft of the criteria on May 20, with a comment period through June 22. Limited market feedback was received, resulting in several clarifications but no material changes in the final criteria. The clarifications are:
--The rating assigned to the counterparty obligation of the grantor serves as a cap on the rating of the project company debt only in cases where the project company's ability to complete the project or the project's performance is dependent on financial performance by the grantor. (Page 2)
--It is possible for the grantor's PPP obligation to be rated higher than or without regard to the grantor's Issuer Default Rating (IDR), specifically in cases where the grantor's obligation is supported by dedicated reserves or specified revenues that under relevant criteria can be reflected by notching up from the grantor IDR or in cases where the grantor makes a specific pledge of revenues that allows the obligation to be rated using criteria for dedicated tax bonds without linkage to the grantor IDR. (Page 4)
--Fitch does not conduct independent assessments of the need for or desirability of a particular project, but rather considers broadly the significance of the project to the grantor's public mission. (Page 8)
--In cases where the grantor's obligation is tailored, for example providing milestone payments in a toll concession or a contingent payment stream to support revenues, the treatment of the liability in the IDR analysis will be considered in the context of the probability of payment being required and the significance of the payment in determining the project rating. (Page 9)
The criteria establish a globally consistent framework to determine if the PPP framework agreement qualifies for assignment of a counterparty rating. It then defines the extent of notching from the general credit quality of the public sector counterparty applied to reflect any perceived higher risk of default under a framework agreement. It also provides guidance on how to consider the PPP obligation in the public sector counterparty's general credit rating as well as how late payment or rejection of an obligation under the framework agreement would be reflected in the counterparty's IDR.
Additional information is available at 'www.fitchratings.com'.
Rating Public-Sector Counterparty Obligations in PPP Transactions