Defaut rates for infrastructure projects have increased over the last 12 months, according to Moody’s.
In a study spanning 20 years of project finance debt transactions, the rating agency found that the 10-year cumulative default rate for the infrastructure sector was 6.6 percent, higher than the 5.2 percent it reported last year.
This increase was largely down to the misfortune of projects exposed to demand risk in the aftermath of the financial crisis, with the default rate for infrastructure remaining lower than the 8.1 percent average displayed by project finance overall.
The study underlined the factors of risk involved in project finance, with borrowers in the sector generally made up of highly leveraged, thinly-capitalised special purpose vehicles with reduced financial flexibility. But it said their resilience lied in their ability to allocate risk and create controls around cash flows, a feature that provided effective protection against defaults and outstanding losses.
“Our research shows that default risk for project finance bank loans is very different from that of general corporates,” said Andrew Davison, a senior vice-president at Moody’s, in a statement. “In particular, marginal default rates, which indicate the likelihood that a loan performing at the start of a specific year will default in that year, decline as loans mature”.
Ten years after financial close, he argued, marginal default rates stand close to levels displayed by single A-rated loans.
The agency also found that recovery rates are higher for projects that default later in the life of the loan, and that losses on projects that default during construction are higher than those that default in their operational phase. Ultimate recovery rates for the whole study averaged 80 percent.
“The report shows that ultimate recovery rates for project finance bank loans are similar to ultimate recovery rates for senior secured corporate bank loans, despite features such as high gearing and long tenor, which are typically associated with higher risk loans,” the report said.