Standard & Poor’s (S&P) has published new criteria aiming to cover the risk associated with pension plans involved in direct debt transactions.
In a move it described as a first for the industry, the agency unveiled a methodology to assess the likelihood that certain types of institutional investors – defined benefits (DB), single-sponsor pension funds – will fulfil their funding commitments to project finance construction.
The initiative is meant to account for the growing appetite of pension plans for direct participation in debt transactions, which has manifested particularly strongly in the realm of infrastructure and project finance.
S&P says the capabilities of some funds to provide “more flexible and effective lending solutions” are rapidly improving, with a rising number of institutions now able to provide debt facilities to projects with structures incorporating quarterly – and sometimes even monthly – advances during the construction phase.
This stands in contrast, the agency says, with traditional funding approaches involving the issuance of a bond, the investment of the proceeds in a secure investment contract and gradual use of the proceeds as construction progresses. This often results in a “negative carry” for the borrowers, as the yield they earn on the cash invested is often lower than the borrowing rates they pay on bonds.
“For transaction sponsors, as well as for those procuring the project, these more flexible structures remove the negative carry and improve the economics of the project,” said Robin Burnett, a senior director at S&P’s and co-author of the new criteria.
“However, from a project perspective, this creates an exposure on the fund or funds providing the financing during the construction phase. Such funds are not typically rated, making the assessment of this risk more problematic for project parties.”
Under the new criteria, S&P’s assessment of pension plan risk will derive from the agency’s view of the creditworthiness of its parent group as well as its willingness to support the plan under all types of circumstances.
It will only assign a risk assessment to pension plans deemed “core” or “highly strategic” to their sponsors, meaning that they are deemed integral or nearly integral to their parent group's identity, strategy and reputation.