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CONFIDENTIAL AND PROPRIETARY.
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Copyright (c) 2007 Standard & Poor’s, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.
Project Finance:
Credit Assessment TemplatesDefault and Recovery Study
October 18, 2007New York Webinar
Risk Solutions
2.
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Agenda
• Risk Solutions Overview
• Project Finance Credit Assessment Templates
• Default and Recovery Study
• Questions and Answers
• Contacts
3.
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Risk Solutions Overview
4.
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Standard & Poor’s Risk Solutions
• Standard & Poor’s Risk Solutions is a global leader in risk management. We provide services, analytics, software, and data to help clients:
– Identify, measure and manage risk;
– Improve financial performance;
– Gain competitive advantage;
– Facilitate and manage change;
– Train and educate staff.
• Risk Solutions leverages S&P’s 140 years of expertise in assessing credit risk and combines it with real world experience to assistinstitutions in managing their credit activities with confidence.
Who we are…
5.
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Standard & Poor’s Risk Solutions
• Services
– Custom Modeling
– Rating Scale Services
– Expert Judgment or Qualitative Credit Assessment
– Validation
– Stress Testing
• Products
– Quantitative Models: Probability of Default, Rating Estimation and LGD Models
– Portfolio Risk Management
– Risk Management Platform
• Data
– Corporate and Structured Finance Default and Ratings Data, Recovery Data, and Data Consortia
What do we offer…
6.
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What do we offer – Asset Class Coverage…
Standard & Poor’s Risk Solutions
- Project Finance
- Leveraged Finance
- Commercial
- Real Estate
- Airlines
- Automotive
- Chemicals
- Consumer Products
- Metals and Mining
- Telecommunications
- Oil & Gas
- Utilities
- Commercial Banks
- Insurance Companies
- Broker / Dealer
- Finance Companies
- Municipalities
- States
- Public Enterprise
- Infrastructure
- Mutual Funds
- Hedge Funds
- Small Businesses
- Private Firms
- Professional Services Firms
Specialized Corporates Financial Institutions
Public Finance Funds
Small to Medium
EnterprisesRetail
- Credit Cards
- Mortgages
- High Net Worth Individuals
7.
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Standard &Poor’s Risk Solutions – Corporate Structure
• Confidential information is “firewalled” between Risk Solutions and all other areas of Standard & Poor’s (e.g., Ratings Group). Risk Solutions is a “non-Ratings” business of Standard & Poor’s.
RiskSolutions
StructuredFinanceRatings
Corp. &Govt.
Ratings
Standard & Poor'sCredit Market Services
8.
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Project Finance Credit Assessment Templates
9.
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Credit Assessment Templates
• Formalization of an expert-based judgment system for the assessment of obligor risk of default in hard to rate sectors.
• Based on Standard & Poor’s credit ratings methodology
• Includes both quantitative and qualitative factors and associated weightings
• Produces a numerical score which can be mapped to S&P rating scale, internal financial institution rating scale, or a PD
• Contains varying degrees of detail, based on the complexity of the specific sector and client needs
10.
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Project Finance Template – Summary Page
11.
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Asset Class / Industry Segment Identification
Credit Factor SelectionGeneral / Sector Specific
Quantification / Scoring of All Credit Factors
Mapping Score to Internal /Standard & Poor’s Scale
Weight Assignment To All Credit Factors
Calibration and Testing
Iterative Process
Documentation and
Training Material
Preparation
Factor, Weighting and Calibration Finalized
Training and Implementation
Template Development Process
12.
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Sample Clients
• Investment Banks
• Commercial Banks
• Finance Companies
• Insurance Companies
• Asset Managers
• Industrial Corporations
13.
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Why Templates for Project Finance?
• Purely quantitative approaches for measuring risk based on a limited set of financial metrics, such as regression and static cash flow models are not effective for assessing highly complex project financings.
• Quantitative measures of debt capacity or debt-service protection must be assessed in the context of the underlying project economics, structural provisions and contractual protections.
• This makes it challenging for credit analysts to interpret and score qualitative risk factors in an objective manner and toapply ratings criteria consistently.
14.
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Project Finance Templates
Project Level Risks
Sovereign Risk
Institutional Risk
Credit Enhancements
Force Majeure
Levels of project finance analysisTemplates mimic the S&P Ratings Process, taking a bottom-up approach:
S&P ScaleBank Master
Scale
Market Protection and Revenue Contracts 5.0Competitive Market Position 5.0
Market Risk Exposure 5.0 1.5
Financial Strength 5.0 1Technology, Construction & Operations 5.0 1
Legal & Finance Structure 5.0 1
Project Level Score (1-10) 5.0
Implied Project Rating 5.0 BBB 4
Country Risk Cap 2.0
Implied Project Rating after Country Risk 5.0 BBB 4
Force Majeure Adjustment (notches)
Initial Project Rating 5.0 BBB 4
Credit Enhancements (notches) 1.0
Final Project Rating 4.5 BBB+ 4+
Project Summary
15.
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Project Finance Templates
5
Project has good long-term supply contracts, but does not fully protect lenders from market risk, inflation or FX risk.
AND Supply contracts are not fully integrated with revenue contracts and/or transportation and storage arrangements. Mismatches exist but are unlikely to stress debt servicing. Project assumes some responsibility for supply logistics.
AND Supply contracts include provisions that partially protect project from input quality variability.
AND Supply interruptability provisions and casualty insurance policies are in place, but debt service is not fully covered under interruption payments and force majeure events.
AND If needed, adequate internationally accepted dispute-resolution mechanisms are in place.
Example: scoring guidelines for qualitative factors“Supply Contracts”
16.
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Project Finance Templates
* These benchmarks are for illustrative purposes only.
min DSCR Score>2.50 times 1
2.00-2.50 times 21.67-2.00 times 3.51.43-1.67 times 51.33-1.43 times 5.51.25-1.33 times 6.51.18-1.25 times 81.10-1.18 times 9
<1.10 times 10
Example: financial benchmarks*
17.
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Project Finance Templates
Example: rating scales
18.
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Project Finance Templates
• Performance Results
– The templates have been tested against ratings (public and credit estimates).
– Results achieved:
254 projects tested
Exact hit = 80%
Within +/- 1 notch = 19%
Within +/- 2 notches = 1%
19.
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Project Finance Templates
Our Suite of Templates Includes:– Generic Template
– Industry specific sub-templates
Power and Energy
Infrastructure
Public/Private Partnerships
Natural resources (Mining, Oil & Gas)
Pipelines
Real Estate
Telecommunications
Aircraft and Ships
20.
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Deliverables
• Scoring Spreadsheet
• User Guide
• Training Workshops
• Credit Estimates for Performance Testing (optional)
• Documentation on Model Development
• Ongoing Support and Maintenance
21.
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Loss Given Default – Selection of Methodology
• Characteristics of asset classes that lend themselves to expert based Loss Given Default assessments:
– They tend to be highly heterogeneous in credit-risk nature.
– Low default frequency
– Volatile default frequency over time
– Many exposures are to firms, projects or transactions in sectors that have undergone – or are undergoing – radical change.
– Exposures are of significant size, and therefore LGD can be large in monetary terms
– Empirical experience is insufficient for the development of an experience-based quantitative approach.
• Project Finance and other specialized lending are typical asset types suitable to this approach.
22.
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Credit Assessment Template for Loss Given Default
• LGD Templates deliver a grade where every grade is assigned a recovery range
Model Based on Economic Value
Grade Recovery Range
1+ 100% of Principal
1 90 - 100% of Principal
2 70 - 90% of Principal
3 50 - 70% of Principal
4 30 - 50% of Principal
5 10 - 30% of Principal
6 0 - 10% of Principal
23.
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Credit Assessment Template for Loss Given Default
• Customized decision support tool
• Based on Standard & Poor’s recovery ratings methodology, but incorporating the client’s own loss experience if available
• The LGD framework commences with the probability distribution of the value attributable to those assets that represent possible sources of repayment – whether secured or unsecured – to lenders.
• Within this LGD framework all the assets of the borrower – and not solely those representing the primary collateral to the lender – are evaluated
• The methodology examines the tail of this (asset value) distribution in the region where default has occurred.
24.
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Loss Given Default Framework
Facility Characteristics in Terms of Ranking
Debt Cushion
Collateral (or equivalent) Value - Economic Basis
Collateral (or equivalent) Value - Liquidation Basis
Creditors Rights in Regime in which Collateral or Equivalent is domiciled
Facility Rating
Different low default portfolios present complexities unique to their particular asset class – although all can be addressed
25.
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Project Finance LGD Template Deliverables
• Industry Specific or Generic Template in Excel
• Guidance on the approach for evaluation of the risk factors influencing loss
• Framework for combining the risk factors into a final LGD assessment
• Guidance and recommendations on the evaluation and scoring of collateral value, enterprise value and liquidation value on a consistent basis.
• Training on Application of the Template
• Customization of Template(s) following review of drafts by the client
• Documentation on the methodology used to develop and test the template
26.
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Gain These Advantages with Our Templates
• Competitive advantage through better risk-based pricing;
• Consistency in risk measurement and decision making;
• Analysis that combines your expert knowledge with our criteria;
• Use of your time and resources more effectively.
• Linkage to observed default rates for S&P ratings
27.
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Default and Recovery Study
28.
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Data Pooling Consortium for Project Finance
• Project Finance is a “strong” asset class
– Banks concerned about the conservative Basel capital adequacy assumptions
– Anecdotal evidence of high post-default recoveries
– Very little empirical evidence on defaults and recoveries in the asset class
• Empirical Evidence is required by banks
– Advanced IRB under Basel II
– Benchmarking portfolio against “the market”
– Support pricing and analysis of CDOs, CLOs
– Better understanding in general of post-default behaviour
29.
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Data Pooling Consortium for Project Finance
• Originally initiated by four global banks in 2001 led by Citigroup
• Currently includes 30 project finance lenders globally. There is an approval process for new members through steering committee.
• Participating banks contribute data (based on data requirementsapproved by steering committee) annually on a confidential basis to Standard & Poor’s who aggregate and analyse it
• 4,029 projects representing over 75% of global project finance syndicated loans, providing a representative and robust dataset to calculate reliable benchmarks. (# based on last year’s study, new study coming out in 2 weeks)
– 334 defaulted projects
– 279 projects emerged from default (consists of 965 bank tranches)
30.
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Database Descriptive StatisticsProjects By Region (Percentage And Count)
Western Europe, 141235%
Eastern Europe, 2065%
Asia Pacific, 46712%
Latin America, 3439%
North America, 95324%
Oceania, 2777%
Africa & Middle East, 3719%
• Over the past 6 yearsThe effort has producedA truly global database
Defaulted Projects By Region(Percentage And Count)
9
63
8
51
100
19
84
0%
5%
10%
15%
20%
25%
30%
35%
Africa & MiddleEast
Asia Pacific Eastern Europe Latin America North America Oceania WesternEurope
Def
aulte
d Pr
ojec
ts
Numerals above bars represent count of defaulted projects.
31.
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Data Pooling Consortium for Project Finance
• Deliverables: comprehensive annual report including:
– Software providing the ability to view, sort and segment the data based on sectors, countries and timeframes
– Software providing the ability for user to compare proprietary with the aggregate data
– Commentary in addition to aggregate statistics
– Distribution of projects by geography, sector , year of origination and year of default
– Cumulative and marginal historical default rates, time to default and time in distress
– Recovery statistics per geography and individual sectors
– Recovery rates on an individual anonymous basis (by geography and sector)
– Correlations
32.
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Standard & Poor’s Experience in Data Pooling
• Risk Solutions has consortium based initiatives in a number of different geographic and asset class markets
– LossStats/PMD - Largest commercially available database of USA defaulted bonds since 1988
– Industry-wide PD and LGD databases for major banks in Australia and Singapore
– In discussions on building bank loan PD and LGD databases in other markets
• Default rate and recovery database for European leveraged finance loans launched with 10 banks in 2006
33.
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Key issues to consider: Project Finance Definition
• A project company is a group of agreements and contracts among lenders, project sponsors, and other interested parties that creates a form of business organization which
– issues a finite amount of debt on inception;
– operates in a focused line of business;
– and asks that lenders look only to a specific asset to generate cash flow as the sole source of principal, interest payments, and collateral.
34.
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Key issues to consider: Default Definitions
• Defining default is critical
– 90 Days Past Due
– Distressed Sales
– Distressed Restructurings
– Liquidation
– Charge-offs
– Bankruptcy
35.
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Key issues to consider: Data Collection
• Minimizing the pain of data collection
• Standard & Poor’s provide a Project Finance template to collect data elements on all loans and defaulted transactions
• Essential Data Fields
– Origination and maturity date for all instruments
– Debt structure (tranches)
– Collateral
– Default date
– Recovery upon Resolution
36.
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Key issues to consider: Confidentiality of Data
• Confidentiality of data is probably the single most important issue for banks - Standard & Poor’s has implemented procedures to address.
• Two Standard &Poor’s divisions are involved in the Project Finance Consortium Operations - Standard &Poor’s Risk Solutions and Standard &Poor’s Data CoE. Both of them are separated from the ratings organization
– Firewall
– Experience with other data consortia
– Professional management of data
– Our reputation
• Data flows directly from the Banks to the Project Manager
• Confidentiality clause part of the Contract
37.
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Process and fees
• Service agreement signed
• S&P Risk Solutions delivers data collection template and training ahead of collection
• Bank delivers data
• S&P Risk Solutions verifies data (project finance definition, default definition, data cleaning)
• S&P Risk Solutions analyses data and provides report
• Participation fee: $50,000 for the 1st year and $25,000 annually thereafter.
38.
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Contacts
Suzanne SmithManaging Director+1 212 [email protected]
Mark HaydoutovDirector+1 212 438 [email protected]
Katarina Antens-millerDirector+1 212 [email protected]
39.
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Webinar Replay Information
Replay Web Streaming:URL: http://www.mymeetings.com/nc/joinConference ID#: PH5510652Passcode: SANDP1Web replay streaming will expire on Thursday, November 15, 2007
Telephone Replay:
Replay Number: 1-203-369-1923
These replays are available until Thursday, October 25, 2007