"Our report shows that the 10-year cumulative default rate for project finance bank loans is consistent with 10-year cumulative default rates for corporate issuers of low investment-grade credit quality," says Andrew Davison, a Moody's Senior Vice President and author of the report.
"Ultimate recovery rates for project finance bank loans average 80%. However, in almost two thirds of cases the most likely ultimate recovery rate was 100% meaning no economic loss," added Mr Davison.
"Our latest study expands and updates the body of Moody's research which has informed market debate on the credit risk of project finance, including the treatment of infrastructure project finance under Solvency II," says Mr Davison.
The report shows that project finance is a robust class of specialized corporate lending, even though project finance borrowers are highly leveraged, thinly capitalised special purpose vehicles with limited financial flexibility.
The study shows that marginal annual default rates improve significantly over time from financial close. This seasoning characteristic differentiates the behaviour of project finance bank loans from corporate bank loans. Marginal annual default rates, a measure of the likelihood that a performing obligor at the start of a year will default in that year, are initially consistent with marginal default rates exhibited by high speculative-grade credits. However, on average, they trend towards marginal default rates consistent with Single A category corporate ratings by year six from financial close.
Ultimate recovery rates for project finance loans appear to be substantially uncorrelated with certain factors which are key determinants of ultimate recovery rates for general corporate debt facilities -- in particular, the legal jurisdiction of the defaulted company and default rates.
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