Institutional funding of infra mixed blessing

Deferred bond purchases by insurance companies, pension funds and other institutional investors have proved a valuable source of financing for greenfield infrastructure projects but, at the same time, these structures present new credit risks, Moody’s ratings agency said in a report released Tuesday.

“While the increased participation of such institutional funds, which controlled an estimated $78.2 trillion in the OECD region at end-2012 is a positive development in the funding of greenfield infrastructure projects, their nature and deal structures can pose credit risks not present in traditional bank and/or bond financing,” Christopher Bredholt, an assistant vice president-analyst at Moody’s and author of the report, said.

According to the report, titled “Deferred drawdown debt structures for greenfield infrastructure present new credit risks,” when debt investors commit to a deferred drawdown schedule over the course of the construction period, the project is exposed to the ability and willingness of those providing the financing to meet their obligations. To what extent a project is affected should a debt investor not meet its deferred drawdown commitments will depend on the project’s risk, liquidity and composition of the investor pool.

However, the credit risks that Moody’s has identified have not yet affected the ratings the agency has assigned to projects “because sufficient mitigants have been in place”. These include investors’ credit quality, the size and diversity of the investor pool, the asset manager’s level of experience, as well as monoline insurers’ guarantees of funders’ obligations.