PPPs and ratings' altitude

Market attractiveness:  what happens when ratings go down?

With the renewed interest in Public-Private Partnerships, one would be tempted to forget what lies intrinsically at the heart of complex contracts often based on project finance, i.e. on funds raised on the financial markets.

While PPPs used to be systematically based on project finance tapping into capital markets (new financing models tend to give public authorities more grasp of their own project and lower their dependency on market cash availability), one of the key conditions to check prior to engaging in complex contractual arrangements was…market testing.

In other words, where the markets in the mood for such investment? Would foreign investors back PPPs through loans, private equity or bonds? In this case, does the performance of a PPP implementation influence market volatility?

This concern is illustrated recently by the downgrade of Ukraine’ financial ratings by Moody on 13th February:

Moody's Investors Service ("Moody's") has today downgraded the Government of Ukraine's foreign- and domestic-currency long-term issuer ratings and foreign-currency senior unsecured debt ratings to Ca from Caa3 and changed the outlook to stable from negative.

At a time where Ukraine seems interested in preparing infrastructure investment and reconstruction using PPPs (which procurement process can actually prove lengthier than traditional procurement, and rely on market stability and investors’ attractiveness), this may not bode so well. The price of relying on private finance? Not only.

In Coventry, UK, Moody downgraded a PPP project company because of concerns about the cashflow of the Partnership operator. This is because the project company could not face its contractual commitment to fund reserve amounts, due to insufficient cashflow.

As a result, the bonds underpinning the Coventry and Rugby Hospital PFI project company have been downgraded by ratings agency Moody’s, announced partnerships bulletin.

Drawing an example from down under, this is the case in New South Wales where performance concerns are rocking Novacare Solutions Partnership, the project company that operates the Mater Hospital in Newcastle, NSW.

Falling short of its expected performance under project completion naturally led NSW to abate the repayments to the project company. This is exactly what PPPs are about: risk allocation, and payment upon agreed performance targets.

When lagging though, the project company sees rating agencies’ threat looming ahead, and its financial indicators as well as investors’ trust plummet, which ultimately can jeopardize the project…..and its public health objectives!

Behind PPPs lie the legal reality that these are complex contracts. To paraphrase Liam Neeson, they may well require “a very special set of skills” to ensure project optimization over its lifecycle by the commissioning public authority.