Call for review of UK PPP credit ratings

Privately financed infrastructure projects in the UK may have been rated too conservatively according to an infrastructure investment analyst, who calls for a reassessment from the ratings agencies.

Former Standard & Poor’s director Robert Bain has called for a re-examination of the credit quality of UK public-private partnerships (PPPs). In an exclusive article in the February 2011 issue of Infrastructure Investor, he argues that PPPs’ typical ‘BBB’, low investment grade ratings appear “very conservative”.

Currently an independent infrastructure investment analyst, Bain uses the ratings agencies’ own published statistics to conclude that, by now, around 25 of the 667 UK PFI (Private Finance Initiative) projects on the Treasury’s Signed Projects List should have defaulted in light of their ratings. Through correspondence with the Treasury, he found the actual number to be between six and eight – with no defaults on debt at all in the rated PPP universe.

Bain says misunderstanding of UK PFI credit quality dates back to the mid-1990s when misleading comparisons were made with project-financed credits in the energy and utility sectors, which had more operational risk and weaker off-takers than PFI projects. “This, together with inherently conservative views about the unknown and untested suggested that, if investment grade at all, low investment grade was probably the right call,” Bain reflects.

Bain argues that because PPPs are different from the broader project finance universe, they “deserve to be treated as an asset class of their own”. His argument draws on comparisons with low investment grade corporate issuers, the predictability of contractual payments received from highly-rated public sector counterparties and the challenges of constructing credible default scenarios when calculating recovery estimates. In light of his findings, he calls for the ratings agencies to publish an “evidence-based defence” to prove that the current ratings are justified.

According to Bain’s calculations, around 60 or 70 PPPs on the Treasury’s List should be defaulting in around five years’ time as they move from their 10th to their 15th anniversaries. “Given that the sector has survived successive political changes and the deepest financial and economic crisis that most of us have witnessed, precisely where are these defaults going to come from?” he asks.

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