S&P: ‘lack of transparency’ could hinder EMEA projects

Increased disclosure of data and more visible deal pipelines are needed to cement a healthier project bond market, says the rating agency.

Releasing more information on contracts and performance will help bring sustainable infrastructure investment in Europe, the Middle East and Africa, according to research by Standard & Poor’s. 
In a report released today, the rating agency detailed 10 factors that would help industry stakeholders build a more robust bond market, as well as allow for project finance transactions to achieve better value for money.
“The infrastructure market is going through a transition period this year,” Michael Wilkins, managing director at Standard & Poor’s, told Infrastructure Investor. “With the re-emergence of project bonds, increased appetite amongst institutional investors to provide long-term debt, and project finance banks coming back into play, we now have a very healthy functioning market. But there’s still some way to go.”
Essential to making further progress was a more thorough disclosure of government contributions and risk bearing under such projects, the report said. More extensive information-sharing on contract details was also seen as necessary to produce sustainable agreements and reduce the risk of renegotiation. 
“The lack of transparency and disclosure of risk heightens investor uncertainty and creates market unease. In our view, the financial reporting of European projects is on occasion incomplete, inconsistent, and unclear,” said Michela Bariletti, a director at Standard & Poor’s. 
Greater light also needed to be shed on issues beyond contractual arrangements, the agency cautioned. This included operations and financial statements line items, as well as the nature and effect of non-forecasted events such as adverse climatic conditions and disputes between contracting parties. 
The report mentioned a number of other important factors that would help the bond market continue on its positive trend, such as a visible project pipeline, standard transaction structures, credit-supportive initiatives, independent and stable regulatory frameworks and packages that could reduce construction risks.  
“Project bonds represent around 10 percent of overall financing, while in the US corporate market they account for close to 60 percent. So some catch-up is still possible before bonds take up as much as bank lending,” Wilkins said. 
A more prominent bond market would help make infrastructure a more attractive investment proposition for LPs – while allowing developers to secure better financing terms for their projects, he added. “The more project bonds you have, the more liquid infrastructure becomes as an asset class. And then pricing becomes reflective of that liquidity and you have a broader investor base.”