French bank Natixis and EDHEC Infrastructure Institute-Singapore have released a new paper entitled Cash Flow Dynamics of Infrastructure Project Debt, the first empirical study of the dynamics of debt service cover ratios (DSCRs) in private infrastructure projects.
In the paper, the authors collected data on infrastructure project cashflows across more than 200 deals in Europe and the United States, covering two broad project categories: those receiving a contracted income and those exposed to merchant or commercial risks.
They conducted a series of statistical tests and analyses to establish the most adequate approach to modelling and predicting future DSCR levels and volatility.
“Most credit risk models of private infrastructure debt use static assumptions which are not suited for project finance because the risk profile evolves dramatically in time,” said Frederic Blanc-Brude, co-author and director of EDHECInfra.
The authors make use of concepts from robotics, which are akin to how driverless cars position themselves in space, to track key cashflow ratios in a mean/variance plane.
“Thanks to this, we can better understand and predict credit risk in private infrastructure debt,” added Blanc-Brude.
“This paper, based on a large and diversified sample of projects, demonstrates what we are experiencing in practice: the nature of underlying revenue models is the most important variable to explain DSCR volatility,” said Anne-Christine Champion, global head of infrastructure and projects at Natixis.
“With a now documented distribution of DSCR associated with a robust valuation framework, investors will be able to make informed asset allocation decisions on infrastructure debt. Those results are also highly valuable to calibrate prudential frameworks and to better align them with the risk profile of the underlying assets,” said Champion.
Next steps with the research chair include the valuation of individual infrastructure assets and building reference portfolios that can be used as benchmarks of private infrastructure debts.