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Credit rating experts say there’s profit in infrastructure

European infrastructure proved itself a safe bet for investors during 2010 and will continue to do so this year, credit ratings experts said last week.

Speaking at Fitch Ratings’ European Credit Outlook conference at the ICE on Friday, Fitch EMEA Infrastructure managing director Dan Robertson said infrastructure was a ‘resilient’ asset class, able to withstand the turbulence in the European investment market caused by the Eurozone crisis.

The overall credit outlook for the projects and companies that Fitch rates in the transport, energy and social infrastructure sectors is stable, added Robertson in the report.

However, he warned that many areas of infrastructure would face specific challenges this year that could put their credit ratings at risk.

Among Europe’s toll roads, for example, Robertson said there was a clear two-tier market emerging.

Positive and negative

“The credit rating outlook for toll roads in mature and well positioned networks, most notably in Italy and France, is stable,” said Robertson.

“However, it is negative for stand-alone schemes, those with aggressive business or financial plans as well as networks exposed to toll-free competition, such as in Spain and Portugal.”

This negative outlook means Fitch expects it will have to downgrade the credit rating of such projects.

This can often further compound a project’s financial woes as its investors may have restrictions on the investment grade quality of the paper they hold, and a downgrade could mean that they become forced sellers.

Renewable energy projects also faced two key risks to their credit ratings this year, said Robertson.

The greatest threat to ratings was legislation changes affecting feed-in tariffs for photovoltaic (PV) solar schemes: France has introduced a moratorium on new solar, restricting the tariff to small scale developments, while the Czech Republic is to tax solar profits and the Spanish government this week will ratify a Royal Decree that restricts existing solar PV schemes’ tariffs to 25 years and cuts tariffs for new schemes by up to 45 per cent.

The other threat to renewable energy project’s credit ratings was overestimation of resources, where wind farms, for example, generate less electricity than was estimated when the schemes were being financed.

However, the sector of the energy market at greatest risk of downgrade was thermal power projects, said Robertson.

“We see a very uncertain picture for that sector in Europe over the next few years,” he said.

“The sun is setting on older coal and oil plans as a result of EU legislation, and the uncertainty for thermal is compounded by government support for renewables and new nuclear.”

Robertson added that he did see a strong market for modern gas plant in the future, but warned that the general uncertainty in the thermal sector would create downgrade risk, especially for the significant number of thermal projects and operators that had to refinance their debt in the coming years.

The refinancing of corporate and project debt is in fact a major risk for all areas of infrastructure and beyond. Speaking at the conference Fitch European Leveraged Finance managing director Edward Eyerman pointed to a spike in loans coming to the end of their tenors over the next five years.

With so many chasing what is a relatively smaller pool of debt than five years ago – when many of these loans that need to be refinanced were signed - smaller firms and projects may struggle to secure debt at prices they can afford.

For more on what this “refinancing wall” means for infrastructure investment, click here.

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