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Understanding Credit Risk in the Unrated Project Finance Universe

Perceived default risk in infrastructure investment is one of the main challenges for market participants in unrated project finance. Part of the concern is how to measure and price risk when public credit ratings aren’t available.

Actually, defaults are quite rare and investor confidence is returning because lenders now have the ability to conduct thorough due diligence and credit analysis with the assistance of expert consultants. For insurers and commercial lenders, the ability to perform analysis on unrated projects means they can link a project with the probability of default.

This is doubly important at a time when the volume of global transactions is growing. The power and energy sectors in Asia Pacific and Latin America are particularly strong while, more broadly, emerging economies are finding themselves challenged by insufficient power supply to meet demand. Therefore, access to comprehensive, comparative data is a concern.

At S&P Capital IQ we’ve met this need by investing in the creation of a global project finance database. Originally initiated by four global banks in 2001, our Project Finance Data Consortium brings together the portfolios of over 300 of the top lending institutions for a comprehensive historical default and recovery database.

With over 12 years of historical data, our established global database covers more than 75% of project finance syndicated loans, and provides benchmarks for 7,596 projects versus 462 projects in the rated universe.

From the data gathered on unrated projects, we have seen an increasing trend in the total number of projects issued worldwide between 2010 and 2013, (~1,000). Notwithstanding, the level of defaults remains quite rare across rated and unrated portfolios (see charts below).

Source: S&P Capital IQ. ‘Update In Global Project Finance’. Project and Infrastructure Finance: New Trends and Credit Risk Factors, 23 October 2014. For illustrative purposes only.

Read more about additional trends within the infrastructure finance market, as discussed at our recent event, here.

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