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Global Credit Research -
01 Feb 2012
London, 01 February 2012 -- A new Special Comment published by Moody's Investors Service highlights
the robust and stable nature of project finance debt, despite the
increasingly challenging climate for the project finance industry in its
traditional form.
The Special Comment -- an updated and expanded version of a study
published in 2010 -- is based on a comprehensive analysis of the
performance of project finance loan transactions over a 27-year
period. The study covers more than half of all project finance
transactions which closed during the period 1983 to 2010, including
278 project defaults.
"The study shows that marginal annual default rates for project
finance bank loans are consistent with high speculative-grade credit
quality during the initial three-year period following financial
close. However, these default rates fall significantly after
this period, trending towards marginal default rates that are consistent
with single-A category ratings by year 10 from financial close,"
says Andrew Davison, Senior Vice President in Moody's Infrastructure
Finance Group and co-author of the report. "This characteristic
of project finance bank loans is significantly different from the marginal
annual default rates we have observed for corporate issuers, which
are broadly stable."
Moody's timely new Special Comment provides an in-depth analysis
of the default and recovery performance of project finance bank loans
and offers strategic insight into the risk profile of this asset class.
The study finds that project finance lending exhibits high recovery rates
for those projects which do default. The mean average recovery
rate is 79.9%, but 63.6% of recoveries
were fully restructured or repaid with no economic loss, when calculated
on a Net Present Value basis.
"Moody's also found that ultimate recovery rates for project finance
bank loans display counter-cyclical characteristics, which
act to diversify risk, compared with vanilla corporate bank loans,"
adds David Keisman, Senior Vice President in Moody's loss-given-default
(LGD) data area, and the report's co-author.
"For example, ultimate recovery rates are substantially uncorrelated
with certain factors that are key determinants of ultimate recovery rates
for general corporate debt facilities, such as the legal jurisdiction
of the defaulted company, the presence of contractually subordinated
debt, and default rates."
Although most project finance borrowers are highly leveraged and thinly
capitalized special purpose vehicles with limited financial flexibility,
the study finds that project finance loans are a resilient class of specialized
corporate lending given that they are structured to be highly robust to
a wide range of potentially severe risks. They are also specifically
designed to minimize any post-default economic loss.
The findings of the study suggest that the risk allocation, structural
features, underwriting disciplines and incentive structures which
characterize the project finance asset class have indeed proven to be
effective.
Moody's report, entitled "Default and Recovery Rates for Project
Finance Bank Loans, 1983--2010", is available for free
to subscribers and non-subscribers alike, on www.moodys.com.
NOTE TO JOURNALISTS ONLY: For more information, please call
one of our global press information hotlines: London +44-20-7772-5456,
New York +1-212-553-0376, Tokyo +813-5408-4110,
Hong Kong +852-3758-1350, Sydney +61-2-9270-8141,
Mexico City 001-888-779-5833, São Paulo
0800-891-2518, or Buenos Aires 0800-666-3506.
You can also email us at mediarelations@moodys.com or visit our
web site at www.moodys.com.
Andrew Davison
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Walter J. Winrow
MD-Gbl Proj and Infra Fin
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Default and Recovery Study Highlights Resilience of Project Finance Loans
No Related Data.
© 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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