PFI/PPP Outlook Stable: Moody's

The outlook for the EMEA private finance initiative/public-private partnership (PFI/PPP) sector over the next 12-18 months is stable, says Moody's Investor's Service in an Industry Outlook report.

"The stable outlook and fundamentals for the EMEA PFI/PPP sector are driven by the strong underlying credit quality of the asset class and resilient contractual structures," says Declan O'Brien, an analyst in Moody's infrastructure finance group.

"Projects generally continue to be well insulated from the financial crisis," explains O'Brien. "During the period 1 January 2009 to 31 August 2011, we took 27 rating actions from a total portfolio of 46 publicly monitored transactions; positive actions have outweighed negative actions by 22 to 5, although many of these rating actions reflect de-risking as projects complete construction," he adds.

Moody's notes that austerity policy measures and value for money are key issues affecting the use of PFI/PPP structures for infrastructure procurement, although deal flow in the first half of 2011 was stable and there is a strong pipeline of projects across the EMEA region.

However, Moody's cautions that, in some cases, deterioration of the host sovereign's creditworthiness may lead to a consequent deterioration in the creditworthiness of a sub-sovereign offtaker, which could then negatively affect the PFI/PPP project's credit standing even if the project is performing well. The underlying ratings of two of the projects in Moody's rated portfolio are now constrained by the rating of the sovereign/sub-sovereign offtaker.

Deteriorating public finances, rising public debt, and uncertainty about the ability of some countries to access finance in the markets has created unprecedented volatility in the cost of borrowing for a number of sovereigns, especially those in euro area periphery countries. This volatility results in higher funding costs for PFI/PPP projects, which, by nature, are intrinsically linked to the credit quality of the sovereign or sub-sovereign entity, as payer under the concession agreement.

Governments of highly indebted countries have developed privatisation plans but will continue to use the PFI/PPP model to fund investment in infrastructure, allowing them to stimulate economic growth without further inflating public debt levels.

Moody's notes that the dynamics of the banking industry are changing; there are fewer banks willing to fund long-term and the regulatory framework for the banking sector will make it less attractive to do so.

A number of developing initiatives (e.g. involving credit enhancement mechanisms, or the creation of infrastructure debt funds) should lead to an increasing number of transactions being funded in the capital markets, providing that these initiatives can be cost-competitive.

The Industry Outlook - EMEA PFI/PPP Sector Outlook 2011 - is available on www.moodys.com.