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Permission to reprint or distribute any content from this presentation
requires the prior written approval of Standard & Poor’s. Copyright © 2014
by Standard & Poor’s Financial Services LLC. All rights reserved.
Credit Ratings: Enhancing Transparency & Comparability
Richard Creed Director Corporate Ratings August 2014
2
Overview
1. Snapshot: Rated Infrastructure In Australia
2. Debt Investors: Appetite Is Strong
3. Criteria Framework: Ratings A Blend Of Business and Financial Risk
4. Australian Infrastructure: Typical Corporate Profile
5. Conclusion
3
Snapshot: S&P’s Rated Infrastructure Issuers
4
Snapshot Rated Infrastructure Entities: - Structured to be Investment Grade - Diversity of ownership: Onshore & Offshore
Issuer Sector Rating Comment
AusNet Services Networks A-/Stable Public Listed; Singapore Power
SGSP (Australia) Assets Pty Ltd Networks BBB+/Stable Singapore & State Grid
Southern Cross Airports Corp Sydney Airport BBB/Stable Public Listed
Australia Pacific Airports Corp Melbourne / Launceston Airports A-/Stable Diversified Fund Manager's
Transurban Toll Roads A-/Stable Public Listed
Adani Abbot Point Terminal Coal Port / Proj Finance BBB-/Stable Private: India's Adani Group
Ancora (RCH) PPP: Royal Children's Hospital BBB/Stable Availability Payments
Infrastructure: About 30% Of Rated Debt In Australasia
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Airports Australian Utilities Consumer RelatedCorporates
Materials & Energy New ZealandUtilities
Project Finance Real Estate
(Mil.
A$
)
Drawn bank debt Other drawn debt
Drawn Bank Debt For Rated Australasian Corporates And Infrastructure
© Standard & Poor's 2014.
6
Investor Appetite Is Strong
Australia Fulfils Debt Investors Requirements For:
Strong legal framework
Policy support
Enforcement
Fair judicial system
Independent regulator
• Empowered to enforce
• Adequately resourced
Political stability
Tariffs adjusted for low collection must cover operating costs plus maintenance
Investment Trends: Offshore Greater Financial Firepower?
• Offshore:
Emergence of Chinese (State Grid)
Canadian Pension Funds
Asian Conglomerates o CKI Group
o Singapore Power
Onshore:
Australian Super Funds o Liquidity requirements / redemption risk?
Listed Funds o Higher funding costs?
9
Criteria Framework
Business Risk Profile Assessment
“…the combined assessments for country risk, industry risk, and competitive position
determine a company’s business risk profile assessment”
10
11
Country Risk Assessments Assigned
Very low risk (1) Low risk (2) Intermediate risk (3) Moderately high risk (4) High risk (5) Very high risk (6)
Australia Austria Abu Dhabi Bahamas Albania Argentina
Canada Belgium Czech Republic Barbados Azerbaijan Bangladesh
Denmark Chile Estonia Brazil Bahrain Belarus
Germany Finland Ireland Bulgaria Cyprus Belize
Hong Kong France Israel China Dominican Republic Congo, Republic of
Netherlands Japan Macau Colombia El Salvador Ecuador
Norway Luxembourg Malaysia Costa Rica Georgia Egypt
Singapore New Zealand Malta Croatia Greece Laos
Sweden Slovakia Dubai Guatemala Pakistan
Switzerland South Korea Hungary Honduras Papua New Guinea
United Kingdom Taiwan Iceland Indonesia Ukraine
United States Qatar India Jamaica Venezuela
Italy Jordan
Kuwait Kazakhstan
Latvia Lebanon
Lithuania Mongolia
Mexico Mozambique
Morocco Nigeria
Oman Paraguay
Panama Russia
Peru Senegal
Philippines Sri Lanka
Poland Tunisia
Portugal Vietnam
Ras Al Khaimah Zambia
Romania
Saudi Arabia
Slovenia
South Africa
Spain
Thailand
Trinidad & Tobago
Turkey
Uruguay
--Ranging from Group '1' (lowest risk) to Group '6' (highest risk)--
Country Risk Assessments By Group And Country As Of Nov. 19, 2013
Industry risk assessments
Industry Classification Score
Transportation cyclical High risk 5
Metals and mining downstream Moderately high risk 4
Auto OEM Moderately high risk 4
Commodity chemicals Moderately high risk 4
Technology hardware and semiconductors Moderately high risk 4
Oil and gas refining and marketing Moderately high risk 4
Unregulated power and gas Moderately high risk 4 Engineering and construction Moderately high risk 4
Forest and paper products Moderately high risk 4
Auto suppliers Intermediate risk 4
Agribusiness and commodity foods Intermediate risk 3
Building materials Intermediate risk 3
Oil and gas integrated, exploration and production Intermediate risk 3
Leisure and sports Intermediate risk 3
Oil and gas drilling, equipment and services Intermediate risk 3
Capital goods Intermediate risk 3
Consumer durables Intermediate risk 3
Business and consumer services Intermediate risk 3
Technology software and services Intermediate risk 3
Containers and packaging Intermediate risk 3
Media and entertainment Intermediate risk 3
Retail and restaurants Intermediate risk 3
Transportation leasing Intermediate risk 3
Telecommunications and cable Intermediate risk 3
Health care services Intermediate risk 3
Health care equipment Low risk 2
Transportation infrastructure Low risk 2 Midstream energy Low risk 2
Real estate investment trusts Low risk 2
Branded nondurables Low risk 2
Pharmaceuticals Low risk 2
Regulated utilities Low risk 1
12
Industry Risk Assessments
Competitive Position
Preliminary
Competitive Position
Assessment
Competitive Advantage
Scale, Scope & Diversity
Operating Efficiency
Profitability
Absolute Profitability
Volatility Of Profitability
Profitability can
strengthen or weaken the
competitive position
Competitive
Position
Assessment
13
Business Risk Profile
Financial Risk Profile
Anchor Modifiers Group
methodology Financial Risk Profile Assessment
14
Benchmark Ranges Cash Flow Ratios
15
Australian Infrastructure:
Which benchmark metrics?
• Typically: the “low-volatility” ratios.
• Reflects sector based criteria factoring among
other things :
Regulated utilities: regulatory assessment
strength and “vast majority” of cash flow from
regulated operations (utilities)
Transportation Infrastructure: business risk of
at least “satisfactory” (airports, ports, toll roads)
Anchor
When two anchor outcomes are listed for a given combination of business risk profile assessment and financial risk
profile assessment, the anchor will be based on the:
– Comparative strength of its business risk profile if the financial risk profile is ‘4’ or stronger (i.e. 1-4)
– Comparative strength of its financial risk profile if its financial risk profile is ‘5-6’
16
Combining The Business And Financial Risk Profiles To Determine The Anchor
-- Financial risk profile --
-- Business risk profile -- 1
(minimal)
2
(modest)
3
(intermediate)
4
(significant)
5
(aggressive)
6
(highly
leveraged)
1 (excellent) aaa/aa+ aa a+/a a- bbb bbb-/bb+
2 (strong) aa/aa- a+/a a-/bbb+ bbb bb+ bb
3 (satisfactory) a/a- bbb+ bbb/bbb- bbb-/bb+ bb b+
4 (fair) bbb/bbb- bbb- bb+ bb bb- b
5 (weak) bb+ bb+ bb bb- b+ b/b-
6 (vulnerable) bb- bb- bb-/b+ b+ b b-
17
Australian Infrastructure Issuers: Typical Corporate Profile
Australian Infrastructure Issuers: Typical Corporate Profile
• Typically Investment Grade: Robust “Business Risk” profiles offset by inherent aggressive capital structures weighing on “Financial Risk” profiles
Business Risk Profile: “Excellent” to “Strong”
o Monopoly Assets, often regulated
o Predictable revenue streams
o Where competitive: Compelling asset rationale e.g. Toll roads
Financial Risk Profile: “Significant” to “Highly Leveraged”
o Stability of credit metrics:
Capex
Dividends
Equity Support
o Financial policies:
Liquidity & re-finance risk
Debt tenor
PPP’s Impact on Government Credit Quality
• SOE and local government debt are part of the government rating
• PPP’s can impact State/Local Rating
- Availability PPP’s - contractual obligation to pay
- PPP Obligation is considered tax-supported debt
• Materiality
• Degree of risk transfer
• Underlying motivation
- Volume based PPP – a possible contingent liability
- Design & Construct may lead to contingent liability for changes
- PPP’s largely bank funded; limited appetite from capital markets since demise of
monolines
• Privatization
• What proceeds used for?
• Value for money – replacement of existing revenue stream
20
Conclusion
- Investor appetite for infrastructure assets remains strong across the spectrum: regulated networks, airports, ports, toll roads, PPP’s
- Competition for mature assets is high, with offshore interest increasing
- Typically we see investment grade outcomes
- Infrastructure provides robust, stable cash flows conducive to high leverage
- Financial polices a key element in the ratings
21
Conclusion
Permission to reprint or distribute any content from this presentation requires the prior written approval of
Standard & Poor’s. Copyright © 2013 by Standard & Poor’s Financial Services LLC. All rights reserved.
Thank You
Richard Creed
Director T: 613.9631.2045 richard.creed@standardandpoors.com
22
23. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
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