SIMCo’s Summary of Moody’s Analysis of Infrastructure Debt

Marginal default rates drop over time as projects move from construction to operation and loans amortize. This is unlike investment grade credit where marginal default rates increase over time

“The findings of the study suggest that the risk allocation, structural features, underwriting disciplines and incentive structures which characterise the project finance asset class have proved effective.”

Moody’s Infrastructure Report 2013

Moody’s recently published its updated study of project finance loans, which now covers 4,067 project financings originated over a 28-year period up to the end of 2011. The study further strengthens Sequoia’s argument that although this is a new asset class for many institutional investors, the behaviour of these assets is well understood.

Sequoia has prepared a detailed analysis of the Moody’s report for its investors.

In summary, we identified the following three themes most relevant for our target loan assets and for our investors.

Western European infrastructure and PPP/PFI loans provide investors with a low-risk asset class.

Performance varies significantly within the project finance asset class:

• Infrastructure has a superior credit profile to other types of project finance
• PFI/PPP loans are demonstrably higher credit quality still
• Western European assets are higher credit quality than the global average

Infrastructure loans, on average, migrate to ‘A’ ratings

Investors benefit from improving credit quality, trending toward “A” credit profile:

• Moody’s data confirms migration of project finance assets to marginal default probability of “A” credits
• For PFI/PPP the convergence to “A” default rate is faster than for any other infrastructure asset class

Superior recovery in the event of default

For loans that do default, recovery is higher than for other asset classes:

• Recovery rates of 80% for project finance, rising to 90% for Western Europe infrastructure
• Recovery rates increase once projects are operational
• Compare to 55% typical recovery rates for BBB senior unsecured bonds