
But what does the evidence tell us about how good those investments might be for investors?
One interesting source comes from a Moody’s study based on the performance of over 5,300 projects. This data represents more than 60 percent of all project finance transactions worldwide over 1983-2013. It is broadly representative of worldwide project finance activity by year, industry sector and regional concentration. The data shows that:
- 10-year cumulative default rates are consistent with those of corporate issuers of low investment grade (Baa) credit quality;
- Marginal annual default rates (the likelihood that a performing obligor at the start of a year will default in that year) trend towards levels consistent with single-A ratings or better by year 10 from financial close;
- Default rates in the Infrastructure industry sector are noticeably lower than in other sectors (and default rates for PPPs are even lower);
- Ultimate recovery rates are high, averaging 80 percent for the study data set as a whole and are slightly higher for PPPs;
- Unsurprisingly, projects face significant incremental risk during the construction phase and/or the commencement and ramp-up of operations; and
- Project finance transactions in emerging markets demonstrate resilient credit strength. In particular, average ultimate recovery rates for OECD/non-OECD projects are similar.
The Moody’s study can be downloaded by non-subscribers (following registration) from the following link: http://www.moodys.com/Pages/PFSplashPage.aspx. Questions about the report can be directed to andrew.davison@moodys.com and/or kevin.kelhoffer@moodys.com.
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