INFRASTRUCTURE AND PROJECT FINANCESECTOR IN-DEPTH 24 SEPTEMBER 2015ANALYST CONTACTSTomas O'Loughlin 4420-7772-1798 VP-Senior Analyst tomas.oloughlin@moodys.comDouglas Segars 4420-7772-1584 Associate Managing Director douglas.segars@moodys.comLaura Schumacher 212-553-3853 VP-Sr Credit Officer laura.schumacher@moodys.comSpencer Ng 612-9270-8191VP-Senior Analyst spencer.ng@moodys.comWere Glad You Asked ThatRefinancing risk is credit negative for projects, but structural mitigation limits the impact.This is the first of a series of research publications called Were Glad You Asked That, which will provide a deeper insight into our view of particular project financing structural elements. In this report we focus on refinancing risk, the risk that following a bullet debt maturity debt service costs could be higher or the issuer cannot raise enough funding to repay principal. We will provide an insight into how we assess the risk and effectiveness of structural mitigants, with examples from our rated universe.¯ Refinancing risk introduces uncertainty over future debt service costs, although structural features can, and regularly do, reduce this risk.¯ Highly leveraged projects with very low base case debt service cover ratios (DSCRs), such as public private partnerships (PPPs), have limited financial flexibility to deal with downside outcomes. A significant rise in interest rates at refinancing can result in the forecast DSCR being close to or below 1.00, making a refinancing not viable.¯ Conversely, projects with less leverage such as those with high base case DSCRs or with contracts that extend well beyond the tenor of the debt, are more resilient to various events, including refinancing risk. A project with forecast cash flows that are significantly in excess of those required to service debt provides a buffer to accommodate increased debt service costs, as well as an economic rationale for refinancing.¯ In merchant power projects cash sweeps are frequently included in the debt structure instead of scheduled amortisation. This reduces the risk of payment default and can improve financial flexibility, but could increase refinancing risk because it increases uncertainty around the quantum of debt that will need to be refinanced.MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCEThis publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.2 24 SEPTEMBER 2015 WERE GLAD YOU ASKED THAT: REFINANCING RISK IS CREDIT NEGATIVE FOR PROJECTS, BUT STRUCTURAL MITIGATION LIMITS THE IMPACT.Refinancing risk introduces uncertainty over future debt service costs, but structural mitigation limits the impact Projects with long-term debt that fully amortises are not exposed to refinancing risk and are usually not exposed to a change in ...
