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Project Finance Risk Solutions Suite of Analytical Products
Contact Us Standard & Poor’s Risk Solutions 20 Canada Square, Canary Wharf, London E14 5LH Support: E-mail: Web:
+44 (0)20 7176 3767 risksolutions_europe@standardandpoors.com www.risksolutions.standardandpoors.com
Risk Solutions Globally New York:
+1 212 438 1456
Asia Pacific: +91 22 675 88 221 Tokyo:
+81 3 4550 8711
Analytic services and products provided by Standard & Poor’s are the result of separate activities designed to preserve the independence and objectivity of each analytic process. Standard & Poor’s has established policies and procedures to maintain the confidentiality of non-public information received during each analytic process. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s. © 2008 Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved. STANDARD & POOR’S, S&P and LOSSSTATS are registered trademarks of The McGraw-Hill Companies, Inc.
March 2009
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Project Finance
Methodology: Project Finance Rating Templates (PD Risk)
Risk Solutions Suite of Analytical Products
Product description:
Why Standard & Poor’s Risk Solutions?
An objective methodology for analysing project finance credits on a logical, consistent and comprehensive basis.
Model reflects Standard & Poor’s well-established project finance debt rating criteria.
Risk Solutions is a leader in the low default environment.
Product features:
Ability to develop templates that reflect Standard & Poor’s credit methodologies.
Replicates S&P PF Rating Criteria
One of the few institutions with the data to facilitate the construction of robust ratings systems for sectors lacking empirical default data.
Credit Enchancements
Standard & Poor’s project finance methodology is based on over 18 years of experience in credit analysis with around 1500 public and confidential transactions evaluated. Well-built historical default and loss severity database based on workout information aggregated from the portfolios of 33 of the top lenders in the project finance (PF) field.
Standard & Poor’s Risk Solutions brings you a suite of products: Your Goal
Our Product
Evaluation of the default probability (PD risk) associated with project finance transactions.
Evaluation of the loss given default (LGD risk) associated with project finance transactions.
Comparison of internal ratings and probabilities of default generated by your model with an independent and reliable external reference.
Sovereign Risk
Fully transparent, intuitive and user-friendly for project finance analysts. Provided with detailed regulatory related documentation and a user guide and on-site training. Model could be used for benchmarking the performance and conceptual integrity. Expert judgement overlay to enhance cash flow & simulation based model assessments. Provide a second opinion on project finance PD risk as an integral input to the overall credit assessment or “checks & balances” process.
Key benefits:
High Performance
80%
Force Majeure
Project Level Risks
PF PD Rating Templates
PF LGD Templates
“Core” component of an internal rating system (IRS).
PF Benchmarking
Approved for IRB approach in numerous countries. Regarded as “best practice” by at least 2 regulators – with alternative methodologies being benchmarked against it. A market standard - 1 in 4 new transactions globally are assessed with the assistance of this suite.
60% 40% 16%
20%
Proven methodology. High performance.
69%
12%
3% 0%
“-2” notches
0% “-1” notches
Demonstrated analytical link to observed default rates of Standard & Poor’s facilitates validation quantification of the template result.
the same as S&P rating
“+1” notches “+2” notches
Wide Sector Coverage:
Estimation of historical default and loss severity of your portfolio in comparison with the market.
PF Data Pooling Consortium
Generic Project Finance. Infrastructure (Toll Roads, Ports, Rail Projects, Airports). Energy (Power Plants, Chemical and Petrochemical Producers, LNG).
Natural resources (Mining, Oil & Gas)
PPP/ PFI.
Real Estate Single Asset Finance.
Real Estate Asset Pool Finance.
FPSO (Floating Production Storage and Offloading Vessels). Single Asset Finance (Aircraft / Rail / Rolling Stock / Shipping Projects). Asset Pool Finance.
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Methodology: Project Finance Loss Given Default Templates
Validation: Project Finance Benchmarking
Product description:
Expert-judgment based methodology embedded in a statistical framework for the assessment of recovery risk for project finance sector based on Standard and Poor’s’ recovery rating expertise. Model produces an LGD point estimate which is also mapped to the Standard & Poor’s recovery rating scale.
Product features:
Facility Risk Rating (FRR)
HIGH
It is provided with detailed regulatory related documentation and a user guide and on-site training. Methodology respects empirical facts.
LOW
Your Requirement
Our Solution
Independent benchmarking tool.
Low risk fast track
Low recovery Focus on ensuring ORR is correct, covenants
High PD - focus on collateral value & enforceability
High risk reject, exit
Independent review of your benchmarking and validation work.
Outsourcing of benchmarking or validation work.
Key benefits:
Extensive experience of implementing both benchmarking and validation projects and our own proprietary validation framework.
In-depth experience in benchmarking and validation can be accessed via a full outsourcing of the project to Risk Solutions. Alternatively we can work on individual elements of any project.
Enhancement of client’s IRS. Increases the consistency, transparency, granularity and accuracy of internal recovery ratings and point-estimates for losses.
Key benefits:
Recognized by regulators as best practice for ongoing risk assessment & surveillance.
Can be utilized as part of a wider validation exercise.
Allows for active portfolio management based on recovery risk: model discriminates significantly facilities with bad recovery prospects from ones with good prospects.
Supplement test data deficiencies.
Improve internal risk and performance management.
Significant savings in regulatory capital: average LGD estimates for most client portfolios are considerably below 45% despite conservative assumptions where appropriate.
Enhance the conclusions on the reliability of internal credit risk models.
Achieve greater degree of confidence on the performance of internal models.
Compare to an independent view on the same portfolio of obligors.
Standard & Poor’s has historically been a trusted reference.
Effective and robust solution in cases where there is insufficient data to build a purely statistical model, capturing all critical information.
Strong performance.
Sectors Covered:
Easy to use probability of default scoring model.
LOW
HIGH
Fully transparent, intuitive and user-friendly for project finance analysts.
Obligor Risk Rating (ORR)
Provide a reliable and structured framework for the assessment of facility LGD.
Benchmarking is the comparison of internal ratings and probabilities of default generated by a bank’s models with an independent and reliable external reference.
Key LGD/recovery points in time for relevant data element collection
Generic. Borrower Characteristics Instrument Information Security Details Guarantor Description
Power (traditional and renewable energies).
Infrastructure (toll roads).
Water Projects.
Mining.
Oil & Gas.
FPSO.
approx. 1 – 5 years
R
O D–1 O: Origination
D – 1: One-Year Prior to Default
D
1st CF 2nd CF
D: Default
R: Resolution
Nth CF CF: Cash Flow
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Data: Project Finance Data Pooling Consortium Highlights:
The PF Consortium represents a historical default and loss severity database based on portfolio/workout information aggregated from the portfolios of 33 of the top lenders in the PF field. Participating banks contribute data annually on a confidential basis to Standard & Poor’s who aggregate and analyse it. Collected data represents over 75% of global project finance syndicated loans, providing a representative and robust dataset to calculate reliable benchmarks.
Deliverables: Comprehensive annual report including:
Default and recovery analysis of participant’s individual Project Finance Portfolio. Default and recovery analysis of all data, on a sufficiently aggregate basis to maintain the confidentiality of other participants’ data.
Distribution of projects by geography, sector, year of origination and year of default.
Aggregated average historic default rates, time to default and time in distress.
Aggregated average LGD per geography and individual sectors.
Recovery rates on an individual anonymised basis (by geography and sector).
Correlations.
Key benefits:
Annual Default Rate by Industry (1990- 2007) Media & Telecom
Metals & Mining
Oil & Gas
Power
Overall
(Default Rate)
Asian financial crisis Tech bubble burst California power price squeeze
1996
1997
1998
© Standard & Poor’s 2008.
1999
2000
2001
2002
2003
2004
2005
2006
2007
Achieving an objective of estimating PD and LGD as accurately as possible. Difficult for banks to address individually. Significant coverage of performing and defaulted projects - data collected from early 1990s and covers over 70% of the worldwide syndicated loan transactions. Confidentiality of data addressed. Project Finance consortium’’s member banks exclusively own the study results.