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Richard Creed - Standard & Poor's - How can credit ratings enhance transparency and comparability in the development of Australian infrastructure?
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Richard Creed - Standard & Poor's - How can credit ratings enhance transparency and comparability in the development of Australian infrastructure?


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Richard Creed delivered the presentation at the 2014 Future of Infrastructure Conference. …

Richard Creed delivered the presentation at the 2014 Future of Infrastructure Conference.

The Future of Infrastructure forum explored state and national challenges which impact the long term economic growth and future of infrastructure development in Australia at this time. It also addressed the latest proposals for changes within Australia's infrastructure.

For more information about the event, please visit:

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  • 1. 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. 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. 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
  • 5. 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 Related Corporates Materials & Energy New Zealand Utilities 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
  • 7. 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
  • 8. 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
  • 10. 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. 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
  • 12. 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
  • 13. 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
  • 14. Business Risk Profile Financial Risk Profile Anchor Modifiers Group methodologyFinancial Risk Profile Assessment 14
  • 15. 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)
  • 16. 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
  • 18. 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
  • 19. 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
  • 21. - 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
  • 22. 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
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