Moody's: Institutional investment key to enhancing project finance

Moody's Investors Service says that pressure on government finances and constraints on bank financing continue to present challenges to large infrastructure financing needs in Asia, and that increased participation by institutional investors could enhance funding.

"Institutional investors are needed to increase funding diversity and provide longer tenor debt, as well as to reduce reliance on bank debt and government funding," says Walter Winrow, Moody's Managing Director for Global Project and Infrastructure Finance.

At the same time, key credit challenges remain for infrastructure project finance in Asia, including the often relatively short tenor of debt and the evolving nature of the region's regulatory environments.

Additionally, institutional investors currently often have limited ability to assess credit risk for infrastructure assets, particularly in Asia, given its diverse regulatory, political and socio-economic environments.

"Long-term institutional investors are well suited to the long-term, stable nature of infrastructure projects, but access to transparent and reliable information is needed to increase investor confidence in the sector," says Winrow.

As such, Winrow notes that the international credit rating agencies can also play a role in developing secondary market liquidity for project finance loans.

"We see credit ratings as useful tools in promoting secondary market liquidity because they are a readily available and globally comparable point of reference that are able to encourage a deeper understanding of credit risk," says Winrow.

In terms of default rates for project finance bank loans, according to Moody's Project Finance Bank Loan Default Study, the marginal default rate for project finance bank loans declines over time and recovery rates are higher than for general corporate credit.

"Our default study shows that the structural features of project finance are proving effective at mitigating losses, particularly in emerging market transactions," says Winrow.

However, the data shows a marked difference between average years to emergence from default for projects located in countries inside the Organization for Economic Co-operation and Development (OECD) (1.9 years) and non-OECD countries (3.0 years). This result mainly points to differences in institutional structures and legal processes between developed and developing countries.

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