Whilst some sectors were already identified by Fitch last year as having negative prospects, the agency's key concern was reduced availability of credit leading to increased refinancing risk, rather than a profound and prolonged global recession. Deteriorating operational performance of assets and the volatility of commodity prices have also now moved to the fore of the agency's concerns.
Infrastructure credits often have a core essentiality and long-term nature that underscore their economic value. As a result, Fitch still believes that the relative stability of project and infrastructure fundamentals will cushion the adverse effects of the turbulent global economy, which is likely to continue beyond 2009. The long-term contractual nature of financial and commercial arrangements, and the structural protections usually present in project finance debt, including the use of stress-testing prior to the assignment of the rating, also provide additional margins of protection.
However, the sector and its ratings are not immune. A key factor for rating stability will be the length and depth of the current downturn - evidence of stress has already appeared in transactions dependent upon volume or price linked to levels of economic activity such as US transportation, and Fitch anticipates that transactions will be tested beyond 2008 expectations. Counterparty risk, from constrained liquidity or credit, and increasingly from the commercial effects of the recession will also be a factor. The former may be more significant for financial counterparties, and the latter for contractors and off-takers. Finally, cost and commodity price inflation may continue to have ongoing implications for some projects through 2009, where projects developed in recent years on the basis of high costs and selling prices may now suffer from a structural imbalance.
Sectors exposed to consumption or discretionary spending will likely be the most vulnerable with regional differences less pronounced due to the global nature of the recession. Projects not subject to demand or price risk such as public-private partnership (PPP) availability transactions and long-term, contracted projects will likely be more stable. However, this is dependent upon stability in counterparty credit quality and in the financial structure. Power projects are also likely to be less impacted (apart from counterparty risk related issues) as electricity and gas consumption tend to be resilient in downturns, especially as generation was closer to undercapacity than overcapacity.
Furthermore, across sectors and regions, projects with limited leverage, strong covenants and structural protections, and strong committed sponsors with long-term strategies are likely to be more resilient than others. Fitch expects that when new funding is available, the terms will be far more stringent and creditor-friendly than was the case in the past few years.
