Asian turmoil hitting project finance debt
Asian turmoil hitting project finance debt
LONDON (Reuters): Standard & Poor's reports this week Asia's financial problems may have a greater impact on project and infrastructure debt than other sectors given that these financings have fueled much of the region's earlier, phenomenal growth, and now will play a major role in any recovery.
The report discusses the impact of the Asian financial crisis on infrastructure projects, the trends driving these impacts, and the lessons that the crisis presents for Asian infrastructure issuers and project investors going forward. This report appears in this week's edition of Standard & Poor's CreditWire.
"The current crisis is the first to hit after extensive placement of infrastructure debt with a wider circle of lenders - both institutions and syndicated lending banks," says William Chew, managing director of Standard & Poor's Infrastructure Finance Group and author of the CreditWeek report.
"While the crisis came as a surprise to many of these lenders, their continued participation will be critical, not only for Asian infrastructure debt, but for all infrastructure debt."
Some of the project and infrastructure credits rated by Standard & Poor's have already been hurt by the crisis. Of the ratings in the region, six were lowered, and eight are either on CreditWatch with negative implications or have a negative rating outlook. This means further downgrades may occur during the next 30 to 60 days.
"Moreover, in this crisis, a few credits face significant potential for default on timely payment of principal and interest," Chew says.
"Indonesian power projects, in particular, face a potential payment default if they do not receive full payments on dollar- denominated or indexed payments required by the power purchase contracts backing these projects."
Standard & Poor's stresses that credit prospects will differ sharply by credit and country context. While the Asian crisis has harmed some credits more than others, Standard & Poor's has identified several themes that are integral to understanding the impact of the crisis on infrastructure projects' credit risk. These themes include currency risks, political risks, and the incompatibility of infrastructure debt and so-called "hot money."
"Market fascination with project and infrastructure debt has, at times, led to an unfortunate combination of hot money seeking short-term high returns and long-term market-return assets," Chew says.
"The reason for this has been the assumption, at least during the upward cycle in lending, that infrastructure assets were so attractive they would support returns robust enough to permit early exit through refinancing."