For the first time, this provides a methodology to assign a "risk assessment" to certain types of pension fund, and to incorporate this view into the rating of project finance transactions that include exposure to these funds as a result of the inclusion of a deferred debt drawdown structure to project finance construction. Pension funds are increasingly acting as direct lenders to projects incorporating such structures for the construction phase of the transaction. Historically this type of funding has been mainly the preserve of commercial banks.
Institutional investor appetite for direct participation in debt funding transactions continues to grow, with a particular focus on infrastructure and project finance. We have seen a rapid development in the capability of some funds to provide flexible and cost-effective lending solutions. More specifically, we are seeing a growing number of institutions that are able to provide debt facilities to projects with structures incorporating quarterly, and in some cases monthly, advances during the construction phase. This is a significant contrast to the traditional approach involving the issuance of a bond to investors; investment of the proceeds in some form of secure investment contract; and gradual use of the funding as construction proceeds, resulting in a "negative carry" (as borrowing rates on bonds are typically higher than investment rates for cash), and ultimately increased overall costs for the project.
"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, senior director in the EMEA Project Finance team and a 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."
The new criteria now provide a framework for the assignment of a "risk assessment" to defined benefit (DB) pension plans with a single corporate sponsor. Specifically, the criteria allow for the classification of a single-sponsor DB pension plans as "core" or "highly strategic" under Standard & Poor's Group Rating Methodology. This in turn allows for an assessment of the likelihood that the pension plan will fulfill all contractual commitments to provide construction financing to a project financing. Such risk assessments will be incorporated in rated project finance transactions that include exposure to such funds, providing further transparency to the market and contributing to the growth and increasing disintermediation in project finance markets.
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