Global Infrastructure and Project Financ

Global Infrastructure & Project Finance
Global
Rating Criteria for Infrastructure and Project Finance

Master Criteria
Inside This Report Scope

Scope ........................................................... 1 Project and Infrastructure Debt Ratings: This report specifies Fitch Ratings’ global
Key Rating Drivers ....................................... 1
Framework ................................................... 2
methodology for assigning new and monitoring existing credit ratings to obligations where
Structure and Information ............................ 3 repayment is dependent upon cash flows from the ownership and operation of an infrastructure
Completion Risk ........................................... 9
Operation Risk ............................................. 9 project or facility, including those with multiple assets in different locations. The borrower or its
Revenue Risk............................................. 13 affiliate (issuer) will own directly or indirectly one or more infrastructure assets that constitute a
Infrastructure Development,
Renewal/Obsolescence, Economic Life .... 15 largely stable portfolio financed by the rated debt. Sector-specific criteria supplement the
Macro Risks ............................................... 17
Debt Structure ............................................ 19
criteria set out in this report.
Financial Profile and Rating Case ............. 22
Rating Sensitivities .................................... 27 Instrument Ratings: Fitch’s global infrastructure and project finance ratings under these
Limitations .................................................. 27
Disclosure .................................................. 28 criteria are assigned to individual debt instruments and are therefore issue ratings. Issuers
Appendix 1 – Completion Risk in Project
Finance ...................................................... 29 could be assigned Issuer Default Ratings, as well. In both cases, ratings do not incorporate
Appendix 2 – Rating Project Finance recovery prospects given a default.
Holdcos ...................................................... 38
Key Rating Drivers

The relative influence on a rating of qualitative and quantitative factors varies between entities
This criteria report replaces the in a sector, as well as over time. As a guideline, where one factor is significantly weaker than
report Rating Criteria for Infrastructure
others, this weakest element tends to attract a greater weight in the analysis.
and Project Finance published on
8 July 2016. The new report is
largely consistent with the previous Completion Risk: Where material to the rating, Fitch evaluates risks that may cause the
one in terms of substance. facility not to be completed on time, on budget, and/or up to the performance standards
assumed for the operating period credit profile. Fitch considers the following factors: the
contractors; cost structure; delay risk; technology risk; internal and external liquidity support or
credit enhancement; and other terms of the construction phase contracts.
Operation, Revenue and Infrastructure Development and Renewal Risks: Fitch’s analysis
addresses the issuer’s ability to generate a stable cash flow based on its legal framework and
fundamental economics. Fitch will evaluate the operating cost, demand, revenue and
infrastructure renewal risks that affect the ability to make debt service payments.
Debt Structure: Structures may include holding company and operating company debt, or
senior and subordinate instruments. Financial analysis considers each of the issuer’s rated
debt instruments separately, taking into account the debt structure, including priorities,
amortisation, maturity, interest risk and associated hedging, liquidity, reserves, financial
covenants, and triggers in the context of the facility’s operating environment. Security package
and creditors’ rights are also analysed where applicable.
Financial Profile: Cases are developed to assess the level of financial flexibility that a facility
Analysts demonstrates, as it encounters stresses expected to occur over the relevant forecast period.
Olivier Delfour Metrics are used to evaluate the issuer’s liquidity profile and overall leverage. Counterparty risk
+33 1 44 29 91 21
olivier.delfour@fitchratings.com
(off-takers, concession grantors, warranty providers) is assessed for each risk factor to which it
relates for its impact on the rated debt.
Cherian George
+1 212 908 0519
cherian.george@fitchratings.com Structure and Information: Any additional risk or risk mitigation flowing from the quality and
Ian Dixon experience of sponsors, strength of the legal structure and/or the quality of information, is
+44 203 530 1815 considered.
ian.dixon@fitchratings.com
Glaucia Calp Macro Risks: Country risk factors, industry-specific risks and the facility’s exposure to event
+57 1 484 6778
glaucia.calp@fitchratings.com risks and mitigating factors to such risks are accounted for in the final rating.
www.fitchratings.com 24 August 2017

Framework
This master criteria report is used by Fitch in conjunction with any relevant sector-specific
criteria. Sector-specific criteria may provide indicative metrics and stress levels, additional
factors, attribute expectations or specific methodologies. The ranking of attributes in this report
represents Fitch’s analytical views for a wide range of facilities. The lists are not exhaustive and
some attributes may simply not be relevant to a specific facility. The attribute tables are not
checklists but qualitative guidance in assessing the attributes of a facility and are only part of
the rating process. In sectors where Fitch has not developed specific sector criteria, the master
criteria may be solely used.
Not all rating factors in these criteria may apply to each individual rating or rating action. Each
specific rating action commentary or rating report will discuss the factors most relevant to the
individual rating action.
These are global criteria and, while each jurisdiction has its own economic and legal
characteristics, the analytical approach to project and infrastructure debt ratings does not differ
across political or geographical boundaries. The rating levels discussed in the master criteria and
any sector criteria relate to Fitch’s international rating scale. For debt issuances in local markets
that require national scale ratings, Fitch will apply a rating within the relevant national scale.
This master criteria and related sector criteria can be used in combination with other Fitch
rating criteria when appropriate.
Evaluate Cash Flow Stability

Fitch’s analysis addresses the facility’s ability to generate a predictable cash flow. This requires
an evaluation of the fundamental characteristics of the underlying asset, considering its legal
framework and fundamental economics, together with any industry specific, political or
macroeconomic risks. We will evaluate the sponsor and legal structure, completion risk,
operating risk, revenue risk, industry risk and macro risks.
Evaluate Financial Structure

The agency considers the financial structure to form an opinion on the capacity of those cash flows
to service the rated debt instruments in accordance with their terms. The financial analysis evaluates
the structure of the issuer, debt structure, including priorities, amortisation, maturity, and interest risk
and associated hedging, liquidity, reserves, financial covenants, and triggers in the context of the
project’s operating environment. Security package and creditors rights are also analysed where
applicable. Counterparty risk (off-takers, concession grantors, warranty providers) is assessed at the
level of each risk factor to which it relates for its impact on the rated debt.
Evaluate Stress Scenarios

Stress scenarios are used to test the cash flow sensitivity in a range of outcomes for key rating
drivers. Rating cases are established to assess the level of financial flexibility that a facility can
sustain as it encounters stresses that can be expected over the relevant forecast period. The
Related Criteria
ability of the issuer to make timely payments takes into account its full resources and capacity
Country Ceilings Criteria (July 2017)
Criteria for Interest Rate Stresses in
as captured in metrics measuring its liquidity profile, such as debt service coverage, project life
Structured Finance Transactions and coverage, net debt to cash flows or other measures of leverage.
Covered Bonds (February 2017)
National Scale Ratings Criteria
(March 2017) Use of Risk Factor Attributes to Determine Stress Levels
Corporate Rating Criteria (August 2017) Most risk factors analysed in this master criteria or the sector-specific criteria will determine
types and levels of stresses that Fitch will include, notably through the assumptions underlying
the rating case. A weaker attribute would directly translate into a more severe assumption (e.g.
assuming more cost volatility would increase the cost stress in a rating case).
Fitch assesses the risk factor attributes on a three-level scale of “stronger”, “midrange”, and
“weaker”.
Rating Criteria for Infrastructure and Project Finance 2

August 2017
Other risk factors would work asymmetrically, where only below-standard features would be
reflected in stress levels or rating levels, while more credit-positive features are expected to be
the rule, and would have a neutral impact on the rating. Below-standard features can in some
cases result in Fitch being unable to assign any rating to the issuer or debt instrument.
The risk factors that translate into differentiated quantitative assumptions or are asymmetric in
nature are marked with the following pictograms in the margin.
Risk Factors Feeding into Stress Asymmetric Risk Factors

Levels
Judgement Upside
Attribute
Downside
Assumption
Source: Fitch Source: Fitch
Typical Attributes and Peer Comparison

Investment-grade ratings are typically associated with facilities, structures, and instruments
displaying predominantly stronger or midrange attributes described in this report combined with
metrics consistent with ratings at that level. Where information on peers for which a rating has
been assigned is available (usually for the same sector, region, and structure), this will be used
for comparative analysis of individual risk factors (both qualitative and quantitative) or in
establishing the rating in the context of the peer group.
Where no specific sector criteria apply completely, appropriate key rating drivers and relevant
metrics will be determined on a basis that seeks consistency and comparability with assets and
sectors having similar risk profiles. For example, an LNG facility is evaluated under the master
criteria and the analysis follows some elements of the approach adopted in criteria for thermal
power projects. A hydro facility is evaluated under the master criteria and the analysis follows
the approach adopted in renewable criteria.
Even if a project meets the indicative financial metrics for a specific rating level, other factors
may constrain it to a lower rating. Factors such as weak sponsors, excessive technical risk,
partial merchant exposure, sub-investment-grade counterparties or other key risk factor
assessments may support a lower rating. Conversely, factors may be present that support a
higher rating, such as exceptionally strong contractual protections, a benign industry
environment, or market dynamics that reduce potential price or cost volatility. Transactions
otherwise meeting the indicative attributes for a specific rating level, but exhibiting financial
profiles lower than indicated for that level, are assessed based on the circumstances particular
to the facility.
Structure and Information

Ownership and Sponsors
The quality of owners or sponsors is an important consideration when assessing the potential
performance of a facility over the life of the debt. Fitch considers this attribute to be asymmetric.
Weak sponsors may cause the rating to be lower, all other things being equal. In contrast, the
presence of strong sponsors will be considered when evaluating the impact of stress scenarios

August 2017
on a rating and the ability of an issuer to manage through those stresses. Otherwise, strong
sponsors cannot raise the rating unless providing binding performance or financial guarantees.
Strong sponsors have significant experience within their own markets and internationally. Prior
experience in the region and country in which the project is located is a credit positive. Fitch will
inquire about previous involvement with similar projects that have been developed and
operated successfully and will look to the project sponsors to demonstrate past experience with
technology and markets.
The involvement of local parties is considered to be advantageous, as they may be more

knowledgeable of and responsive to business and politics in the country. In some cases,
sponsors may be public entities or agencies, in which case other factors may prevail (for
example, such sponsors would rarely have international expertise but may be in close control
of political and regulatory aspects). The agency also considers the issuer’s ownership structure
and its complexity, whether there are multiple owners, the potential for change of ownership,
and the flexibility to resolve issues relating to the completion or operation of the facility. The
alignment of interests between owners, contractors, and lenders is reviewed for obvious
Asymmetric Risk conflicts in adverse circumstances and contract negotiation.
Fitch looks for evidence of the sponsors’ commitment to the facility. Sponsors with significant
Upside resources, time, and reputation invested in the facility, including higher levels of direct equity
investment or guarantees combined with covenants to retain adequate capitalisation or public
service focus are considered stabilising factors. The strategic importance of the facility to the
sponsor is considered. For example, the sponsor’s performance on a high-profile project may
Downside heavily influence the chances for subsequent business within a country or region and their
reputation in general.
Ownership and Sponsors

Neutral to the Sponsor has some experience of similar projects; sponsor has history of support for
Weaker features could have negative Rating investments, minimum ownership and change of control covenants through
influence on the rating if the role of completion or, where relevant to a stress scenario, the debt life; strong or midrange
sponsors is deemed important to the financial capacity.
project
Source: Fitch
Negative to the Owner sponsors without previous experience in similar projects; weak financial
Rating strength; no majority/controlling owner/sponsor; inexperienced or minor trade or
financial sponsors; borrowed/leveraged equity; multilayer ownership structure;
speculative or short-term business model.
Source: Fitch
Sponsors without operational resources or capacity for technical support are unlikely to be
ascribed any rating benefit regardless of financial strength. Fitch assesses the financial
strength of sponsors or external support to meet financial obligations as part of its financial
analysis (see Financial Profile and Rating Case section). Unless there are contractual
guarantees, Fitch will not assume that sponsors will systematically provide financial support in
a timely manner to honour an Issuer’s financial obligations.
Issuer Structures
This part of the analysis establishes the degree to which factors other than the economic
success of the facilities might affect the cash flows available for debt service.
Legal forms of issuers can be varied, based upon regulatory, tax, accounting, as well as
decisions made on limitations of activities and other considerations. In some cases, trust
structures may be used. Fitch’s infrastructure and project finance criteria assume that the
assets and operation of the facility can be evaluated effectively as an independent entity that is
not exposed to the exogenous risk of insolvency of any owner or affiliate of the Issuer. In many
cases this can be accomplished with the existence of a special purpose vehicle or equivalent
means of segregation to ring-fence the assets and operation of the facility and the cash flows,
which are the repayment source of the rated debt instruments.

August 2017
In other cases, insulation from the insolvency of an owner or affiliate may be achieved through
specific legal frameworks without the existence of a special purpose vehicle (as would be the
case for airport and other transportation revenue bonds in the US for instance), through
corporate structures that include many shareholders or by contractual structural or trust
features. Structure diagram below provides a diagram of a legal structure common to
standalone project debt financing.
When facilities are owned by one operating company (Opco), itself held by one holding
company (Holdco), and both are single purpose entities (although the Opco may own several
assets as long as cash flows are mutualised), the ratings of the Opco and Holdco would be
assessed on a standalone basis. The Holdco will have cash flows derived from the dividends it
can receive from the Opco, which may themselves be subject to distribution restrictions at
Opco level.
The consolidated profile will be assessed to ensure that Holdco debt cannot effectively be rated
higher than if it had been junior debt at Opco level. A more detailed analytical framework is
provided in Appendix 2. In some jurisdictions, the issuer could, if not properly separated from
the sponsor/parent, be subject to a claim that its assets and liabilities should be consolidated
with those of the parent/sponsor in a bankruptcy. In jurisdictions where there is a risk of such
consolidation, Fitch will consider legal analysis, which may include a legal opinion, that the
issuer will not be substantively consolidated with its ultimate parent in the event of the parent’s
bankruptcy.
Where Fitch concludes that the basis for separation of the issuer from its sponsor is insufficient,
other Fitch criteria may be considered, such as criteria evaluating parent and subsidiary rating
links or criteria used to evaluate rating linkages between government and government-owned
enterprises. This may lead to a constraint on the rating.
When rating an independent operating entity, Fitch would expect key contracts to be in the
name of the Issuer or for the sole benefit of the segregated facility. However, the operating plan
for the facility is reviewed to consider what liabilities it might incur through employees, trade
debt, taxation, environmental, and operational risks, and to what extent these are
subcontracted or mitigated. The issuer could also have a corporate charter, bylaws or statutory
limitations on its own activities as well as other provisions delinking its operations and finance
and financial reporting from that of any owner or sponsor. Where a public sector entity owns or
controls the issuer, law governing the separate nature of the facility’s operation and legal
separateness should insulate the facility and its cashflows from the insolvency of the public
sector entity.

August 2017
Structure Diagram
Sponsor A Sponsor A Sponsor A
Equity
Hedging and Working

Capital
Counterparties
Rated
Senior Debt
Revenue
Concession Contract
SPP Borrower Senior Lenders
Off-Taker
Sub
Debt Subordinated
Lenders
Risk Transfer
Subcontractor One Subcontractor Two Technical Legal

Construction Construction and Market Advisors
Source: Fitch
Counterparty Risk
Risk transfer to counterparties is a central theme of many project and infrastructure finance
transactions. The value of a risk transfer to the rating will depend on the counterparty’s financial
capacity to absorb that risk. As a general principle, where the financial resources or cash flows of
the issuer are dependent on the financial performance of a counterparty to whom warranty,
completion, revenue, cost, supply, liquidity, interest rate, or other risks has been transferred, this
is given credit to the extent the counterparty has a rating commensurate or superior to the rating
of the issued debt. Unless otherwise enhanced, a counterparty upon whom the issuer has a
dependency may constrain the rating of the Issuer debt. This would typically be the case in fully
contracted transactions where offtaker or grantor credit quality is a cap on the transaction’s rating.
Where certain risks are fully transferred to a third party, they may not be subject to any
stresses in Fitch’s analysis, but a rating dependency on the counterparty will be established as
a result. The conclusion that the risk transfer is effective is reached only after review of the
risks and mitigants in the contractual and legal frameworks applicable to the issuer.
If the guarantor acts as a substitute for the credit quality of an issuer, Fitch would equalise the
rating of the issuer to that of the guarantor, and may analyse summarily the underlying
qualitative and quantitative attributes of the issuer.
The ratings for any counterparty where financial performance is key to issuer performance is
based upon a Fitch rating assigned by the relevant analytical group. Rating dependencies
where any change in counterparty rating may affect the project finance rating will be highlighted
and any rating linkage where the transaction rating will move with the counterparty rating will be
made explicit. Where no rating published by Fitch is available, an internal private rating can be
used. Where the counterparty’s financial performance is considered in the analysis but the
counterparty does not dominate the rating of the transaction, an internal credit opinion can be
used. Structural features to mitigate deteriorating counterparty risk, such as rating triggers or
financial ratio tests, are examined.
For project financings, especially greenfield projects with no existing revenues, typically all
sources of capital (equity and debt) have to be committed at financial close. Unfunded equity or
debt commitments are typically backstopped by an entity or instrument with a credit quality

August 2017
commensurate with the project rating. This includes delayed draw transactions involving
institutional investors, commercial banks and other similar investors of debt capital. An
exception is made where a small subset (less than 20% of total debt subject to delayed draw)
of committed investors’ credit quality is insufficient or not known.
Fitch believes that there are strong incentives for the larger funders of the project to cover any
funding gap if the minority funder cannot honor its commitment, and the project is otherwise
proceeding to completion as this is the best way to mitigate potential loss. The project company
may be exposed to increased cost of funds in that scenario and this can be appropriately
evaluated as an alternative stress in the financial analysis. (See Security Package and Creditor
Rights and Financial Profile and Rating Case sections).
Throughout this report, where a qualitative assessment of risk incorporates, among other
elements, the qualification and strength of a counterparty, the classifications in the table below
are used when considering financial resources of such counterparty in the context of that
overall risk assessment. These are used in the assessments of other risk factors (e.g. debt
structure for hedging counterparties or revenue risk, as defined in relevant sector-specific
criteria reports.
Counterparty Characteristics
Stronger attributes A stronger counterparty will have a rating in the ‘A’ category or higher.
Midrange attributes A midrange counterparty will have a rating of ‘BB+’ or in the ‘BBB’ category.
Weaker attributes A weaker counterparty will have a rating of ‘BB’ or below.
Source: Fitch
Legal and Regulatory

Forming an opinion of the quality of the legal or contractual framework upon which many
Asymmetric Risk assumptions rest is a prerequisite to the credit analysis. For instance, the framework may be
purely contractual or rely on statute or codified law, or a particular statutory instrument, or the
powers of a constitutional or statutory authority. Fitch forms a view on the clarity of the
Upside
legislation and/or regulation, the scope of regulatory discretion, and any effect this may have on
facility performance or dispute resolution. The contract suite (and if appropriate, any legislation
it may depend on) or detailed summary documents (such as offering materials) are reviewed
Downside for key commercial elements and contract clarity, especially regarding allocation or transfer of
risk.
Unless otherwise stated in its issue report, where the project requires that the contracting
parties hold licenses, permits or regulated status, Fitch will seek confirmation that all relevant
licenses, permits, or regulated status have been obtained and are valid under all relevant laws.
Weaker features would result in wider
stresses applied on the relevant aspects of The agency will analyse the risk of loss of or renewal of such licenses, permits, or regulated
the projects/issuer (e.g. revenues, costs,
cost of debt) affected by the legal features status within the particular jurisdiction.
Source: Fitch
Legal and Regulatory

Neutral to the Strong precedent for key contracts; all relevant licenses, permits or regulated status
Rating have been obtained and are valid and are likely to be retained and remain valid;
allocation of project and financial risk clear but may have performance conditions.
Negative to the Project contracts, regulatory or statutory framework is dependent upon untested
Rating legislation or regulation; weak or no legal opinions; contracts not available for inspection;
all relevant licenses, permits, or regulated status have not yet been fully obtained.
Source: Fitch
Other matters, such as collateral rights, or statutory ownership restrictions, will be reviewed
case by case. Fitch will rely in its credit analysis on legal opinions or legal memorandums to the
extent that they are provided by transaction counsel, legal precedent that the agency is aware
of, and/or statements by regulators or governments.

August 2017
Fitch also considers the country of operation (often the location of capital assets) and the
country of incorporation of the project vehicle, issuer, and other key parties, together with the
reliability and creditor orientation of their legal systems. See the Macro Risks section.
Data Sources
Fitch’s analysis and rating decisions are based on relevant information available. The sources
are the issuer, the arranger, third-party engineers or consultants, and the public domain. This
Asymmetric Risk includes publicly available information on the issuer, such as audited and unaudited (e.g.
interim) financial statements and regulatory filings. The rating process can incorporate
information provided by other third-party sources. If this information is material to the rating, the
Upside specific rating action will disclose the relevant source.
The key rating assumptions for the criteria are informed by Fitch’s analysis of transaction
documents and of data received form issuers, arrangers, third-party engineers, consultants and
Downside other third-parties; discussions with issuers and/or obligors for financed projects; and public
information as well as Fitch’s analytical judgement.
Information Quality
The quality of information received by Fitch, both quantitative and qualitative, can be a
A weaker attribute for Information Quality
constraining factor for ratings. Information quality may constrain the rating category to a
may lead to the decision not to rate the maximum level or in extreme cases preclude the assignment of a rating. Information quality for
relevant debt or issuer, as availability of
minimum information is critical to assign the initial rating and for surveillance purposes is considered when a project finance rating is first
and maintain a rating
Source: Fitch
assigned. Fitch must be confident that adequate ongoing data will be available to monitor and
maintain a rating once assigned. Information quality encompasses such factors as timeliness
and frequency, reliability, level of detail, and scope.
Information Quality
Neutral to the Data from actual operation; regular updates; independently validated; forecast
Rating supported by significance or error range statistic; no history of material data errors;
detailed cash flows — receipts and disbursements; audited financial data; significant
amount of public information available.
Wider stresses in Substantially based on assumptions; extrapolated; subject to material caveats; data
Rating case often subject to delay; history of revisions or errors; limited scope.
Source: Fitch
Use of Expert Reports

The information provided to Fitch may contain reports, forecasts, or opinions provided to the
issuer or their agents by various experts. These include legal advisors, third-party engineers,
Rating Case Input traffic, market, fuel/resource or environmental consultants, insurance advisors, and others.
Sector criteria will describe the reports, forecasts, or opinions that are most relevant to risk
analysis in the related sector. Fitch will question the source and reliability of the facts presented
in these reports, as well as the reasoning and facts supporting forecasts or opinions.
Judgement
The status of the expert and the materiality of their forecast or opinion will also be considered in
determining what weight may be given their forecasts or opinions. Factors such as experience
Attribute in the jurisdiction, location, or terrain, experience with the technology or transaction type, and
formal qualification or licensing are often relevant. When forming its rating opinion, Fitch may
place less weight on expert reports that lack clarity or contain extensive caveats, or where
Assumption conducted under less relevant circumstances, or where not conducted according to
professional standards. Such features may lead to adjustments in Fitch’s financial or
operational analysis. If possible, reports are compared with similar reports to highlight unusual
A weaker attribute would lead to wider or optimistic features.
stresses applied on the relevant
assumptions affected by lack of supporting
material (eg revenues, costs etc.) The degree to which Fitch uses expert information will depend partly upon the above issues
Source: Fitch
and on the relevance of the information to the identified key risks. Where available, if expert
information does not address a material issue, but might be expected to, Fitch may request

August 2017
further information or make an appropriate assumption. Where Fitch determines that the
reports are not sufficiently supported, complete or reliable, it may choose not to provide a rating.
Expert Reports
Stronger attributes Major, specialised third-party advisor; specific experience with technology or sector,
jurisdiction, and location; projections and estimates based on tested or proven
operation or precedent; no material unsupported assumptions; report demonstrates
analytical rigour.
Midrange attributes Third-party major advisor experienced with similar technology or sector; advisor may
not have experience of location; advisor may be regional specialist familiar with the
technology; estimates based on short operating history and/or rich industry data;
some dependence on reasonable assumptions; formally qualified or licensed where
required (e.g. under the local law).
Weaker attributes Smaller or less experienced advisor; innovative technology or new sector; estimate
data sourced from manufacturer or highly model dependent; high dependence on
assumptions or sponsor estimates; report contains incomplete or limited reasoned
analysis.
Source: Fitch
Completion Risk
Fitch routinely rates greenfield facility debt before the facility is fully developed. Completion risk
covers the risks in the construction, commissioning, and ramp-up phases of a project that may
cause the project not to be completed on time, on budget, and/or up to the performance
standards assumed for the operating period credit profile. The likelihood of these events
occurring and their potential consequences are assessed.
Completion Phase While Operations Continue

Issuers operating large infrastructure assets, such as airports, toll road networks or LNG
projects, engage in large capital projects as part of infrastructure renewal and extension even
while continuing operations. The management of risks within the context of existing
infrastructure facilities are discussed under “Infrastructure Renewal” or “Operations”.
Please refer to “Appendix 1 – Completion Risk in Project Finance” for a detailed description of
completion risk.
Operation Risk
Operation risk is the risk that the project will suffer a reduction in availability, productivity or
output or, alternatively, the project will incur operating, maintenance or life-cycle costs that are
higher than projected. Any of these may result in a reduction in projected cash flows or a
breach of contractual performance requirements, reduce the project’s financial flexibility, and
potentially impair the ability of the project to service its debt. These risks are reviewed to
assess the likelihood of the events occurring and the consequences if they do.
The extent and nature of the risks vary by project sector but maintenance is a key factor for
output, availability, and cost. The analysis of operation risk focuses on the ability and financial
health of the operator, the cost structure, and the supply risk. Analogous contract risks are
considered again for the operation phase.
Operator
Operating profiles vary across the spectrum of project and infrastructure finance.
Self-Operated Facilities
Large infrastructure facilities are frequently self-operated with some contracting to third parties.
In those cases, Fitch evaluates the experience of the management team, their record of
revenue and cost management, facility maintenance, and capital renewal and their
effectiveness relative to peers. Similar to an assessment of ownership and sponsors, Fitch
considers the quality of operator an asymmetric attribute. A weak management team may
cause the rating to be lower, all other things being equal. The presence of a strong

August 2017
management team will be considered when evaluating the impact of stress scenarios on a
rating and the ability of an issuer to manage through those stresses.
Contracted Operation
Standalone project financings typically rely heavily on contractual relationships to transfer risks
and operate on a smaller scale. The contractual operator’s ability to operate the project
efficiently and effectively is usually evidenced by past experience with the same type of project
and technology, ideally in the same country or region, together with adequate resources,
including relevant qualified staff. Although these are similar to those for construction
contractors, contract periods are typically much longer with a wide range of complexity between
projects from smaller, basic availability schemes to technically advanced, market-exposed
large-scale projects.
Fitch will assess whether the operator’s compensation reflects the risks and performance
standards of the contract, allowing a reasonable prospect of absorbing the risks and achieving
the standards. Fitch will review the report of the third-party Technical Advisor (TA) to assess
the reasonableness of the proposed operating costs for a project. Contracts that appear under-
priced may be considered credit negative if, for example, this might lead to delay or reduced
expenditure on repairs and maintenance. Achievable performance-based measures (either
penalties or bonuses) may be considered credit positive if they provide an incentive to achieve
Asymmetric Risk or surpass projected performance.
Penalties for underperformance will be evaluated for reasonableness based on an assessment

Upside
of whether they are proportionate and cover lost revenues that result from substandard
performance by the operator. Bonuses will be considered incurred costs in scenarios where
they are likely to be incurred. An operating and maintenance contract that provides a clear
mechanism for dispute resolution, thus avoiding interruption of cash flow for rated debt service,
Downside is considered typical in project finance.
Fitch assesses the performance risk based on the operator’s track record, third-party
engineering reports, peer analysis, operating complexity, and contractual/structural flexibility.
Grace periods, flexible maintenance schedules, and other such features may act as mitigating
factors. However, onerous terms such as challenging deadlines or concession termination
stresses applied on the relevant aspects of
rather than financial penalties are considered weaker attributes and may constrain the rating.
the project/issuer (eg revenues, costs,)
affected by the operator quality
The reputational importance for the operator of a high profile project either for technology, scale
Source: Fitch
or national prestige may add an incentive but is unlikely to benefit the rating in isolation. An
operator may also be a sponsor or constructor of the project or have some other interest. In this
case, both incentives and possible conflicts are considered. However, the key rating issue is an
alignment of interest with the rated debt holders.
Operator
Neutral to the Management team with good record of successfully managing asset; extensive
Rating experience with similar projects; international reach with local experience; multiple
alternative operators available; ease of replacement; project is a landmark for the
operator.
Wider stresses in Management team with subpar record of managing revenues and costs; project
Rating case requires specialty operator with few or no alternative operators available and no
effective mitigation; limited to no experience in sector; unclear replacement provisions;
uneconomic contract; poor reputation; limited in-house resources.
Source: Fitch
The operator’s financial position is considered to the extent that it might constrain its ability to
operate the facility throughout the life of the debt (performance risk). Where operation by a
specific operator over the life of a transaction is judged to be a material factor, it is likely to
establish a rating dependency on the operator. The materiality of this risk will also depend on

August 2017
the availability of a replacement operator or other contract party; factors such as specialist skills,
size of project, and location, as well as contractual remuneration, can determine this.
Projects typically require their operators for a long period, raising risk and the importance of an
available replacement. Replacement of an operation and maintenance contract that was
underpriced may result in additional cost or negotiation, particularly if the operator is affiliated to
other project parties. Fitch evaluates the extent to which the issuer or noteholders have rights
to replace an operator and the related time in which they can do this. A financially strong
operator cannot increase the rating unless they provide binding performance or financial
guarantees (including undertakings to absorb costs beyond projected ones).
Rating Case Input
Costs
Fitch reviews the makeup, timing, and potential volatility of operating costs. Operating costs
vary by project but usually include some combination of the following: commodities and utilities,
Judgement
labour, taxes, insurance, maintenance, and capital expenditure or life-cycle costs. In contrast to
the construction phase, the operating phase may have a high component of cost that is
variable (passed through to revenues), thus reducing operating leverage, which is seen as
Attribute
positive. The exposure of the project to unanticipated operating costs is reviewed and reflected
in the stresses in the cash flow analysis.
Assumption
Cost mitigation through risk transfer to strong subcontractors or supplier inflation-based
contracts, cost-plus contracts, and the like are considered in the rating to the extent the
financial strength of the counterparty is commensurate with the rating of the debt (see Financial
Attributes on operating costs will directly
drive the magnitude of stresses included in Profile and Rating Case section). For new projects, Fitch will review third-party engineering
the rating case. They will also inform the reports when assessing future capital expenditure or life-cycle costs, for timing and amount.
choice of sensitivities and the
interpretation of break-even results
Source: Fitch For an existing infrastructure facility, Fitch would review third-party reports prepared for
management in the development of the capital improvement and maintenance plans for the
asset. When infrastructure facilities are self-operated and less dependent on contractual risks’
mitigation, Fitch will review operating plans and third-party reviews of such plans as are
available, and consider operating history, if any, and operating cost profiles of relevant peers.
The assessment of operating cost risk, relative stability or volatility, and the ability to recover
costs within the revenue framework will be reflected in the rating case and the sensitivity
analysis.
Operating Costs
Stronger attributes Well-identified cost drivers; flexibility in timing for major costs (life-cycle); generous
provisions for cost variations; costs well spread over time; highly
predictable/contracted cost profile; strong ability to vary cost with demand; not capex-
intensive; low maintenance cost profile; costs substantially recoverable under
concession or framework contract; reserves cover contingent costs; pass through of
costs to entities with strong financial capacity.
Midrange attributes Predictable cost profile; ability to vary marginal cost with demand; material capex;
cost increases reflected in regular revenue adjustments (tariff adjustment,
benchmarking, or market testing) with transparent methodology; well-identified cost
structure dynamics; pass through of costs to entities with midrange financial strength.
Weaker attributes High sensitivity of project cash flows to the timing of costs; lumpy cost structure;
volatile cost profile (labor/energy/technology); history or risk of labor disputes; highly
capex-intensive; high maintenance cost profile; no cost pass through; weak or no
operating reserves; pass through of costs to entities with weaker financial strength.
Source: Fitch

August 2017
Supply Risk
Some projects require that a resource or product is available for operation. Examples are
projects designed to convert or use an input to produce a specific output and generate
revenues based on the volume of such output, such as LNG, thermal power, and water
treatment facilities. This resource or product can take many forms. Fitch evaluates the risk that
these resources or products are not available in sufficient quantities and/or at prices that allow
the project to operate as projected. In projects that involve the extraction of a resource or
commodity, an assessment of the supply risk will involve a determination of the sufficiency of
reserves and the cost of extracting the commodity. Fitch will review third-party expert studies
when addressing these issues.
If a resource or product is supplied to run the project, the agency considers the availability of
the resource or product. If liquid markets exist for required commodities, Fitch considers the
potential for temporary supply constraints rather than long-term availability deficits. Where
relevant, this includes an analysis of the price at which a substitute resource or product is
available. In projects where supply risk is high, and markets are characterised by illiquidity,
Fitch may stress the cost of a volatile commodity. Supply risk may be mitigated by long-term
supply contracts with suppliers having a credit quality commensurate with the rating of the debt.
These contracts may fix the volume and/or price at which the resource or product is supplied.
Rating Case Input See the Counterparty Risk section.
Supply Risk
Judgement Stronger attributes No supply constraints for labour or materials; excellent transportation/utility
infrastructure; connecting infrastructure in place  alternatives exist; commoditised
nature of key supplies; low or no exposure to input costs; sufficient independently
verified reserves; pass through of supply price and volume risks on long-term contract
Attribute to a financially strong counterparty.
Midrange attributes Adequate supply of materials and labour with limited volatility (amount and timing);
good transportation/utility infrastructure; connecting infrastructure in place — limited
alternatives; pass through of supply risks to an entity with midrange financial strength.
Assumption Weaker attributes Potential for supply constraints; monopolistic supply; poor transportation/utility
infrastructure; weakness in connecting infrastructure; reliance on development of
reserves; pass through of supply risks to an entity with weaker financial strength.
Source: Fitch
Attributes on supply risk will directly drive

the magnitude of stresses included in the
rating case. They will also inform the The importance of fixing the price at which the resource or product is supplied depends on the
choice of sensitivities and the volatility of the price of the product and how the off-take price is determined. Where input cost
Source: Fitch increases could make the project’s output uneconomical, fixing supply costs through a contract
with a supplier having a credit quality commensurate with the rating of the debt can be effective
mitigation. However, if the resource or product represents a pass-through cost in determining
the revenue of the project, then fixing the price of the input is not so important except when
reduced off-take volume may result.
Fitch examines how the product or resource is supplied to the project, especially in terms of
connecting infrastructure or availability of reliable alternative supply routes. The credit quality of
any party involved in supplying the resource or product is assessed. If credit quality is not
commensurate with the rating of the debt, and price volatility is low, the availability of back-up
suppliers may be an effective mitigating factor. This is an analytical question evaluated through
stresses considering price volatility, as well as break-even analysis evaluating resilience under
historically high price levels. See Financial Profile and Rating Case.
Technical Risk
Technical risk during the operating phase centres on maintenance and performance within
projected cost. This risk varies significantly by project type. When the technical process is
conventional and proven, the risk is not as great or it is easier to quantify based on past
experience. Even technologies with proven reliability depend upon maintenance standards
being met. Evidence of qualified staff, adequate budgets, and availability of parts and

August 2017
consumables and, in some cases, manufacturer support is evaluated. Alternative sources for
goods and services are seen as positive in mitigating cost and delays.
Asymmetric Risk
Technical Risk During Operation
Neutral to the Rating Many years of successful operating history and proven performance; low technical
Upside maintenance component; parts/labor widely available; diversified technology risk;
minimal third-party supporting technology; warranty or service contracts; adequate
redundancy inbuilt.
Wider stresses in Proprietary or innovative technology; untested over long term; revenues dependent
Rating case upon high performance or availability; non-diversified operating assets; material
Downside dependence on external supporting technology; safety or environmental norms not
finalised.
Source: Fitch
Flexible opportunities for maintenance, an experienced operator, and technical risk diversified
over several units can all be positives. Technical risk increases significantly with new and
stresses applied on the relevant aspects of unproven technology. Fitch will expect the third-party engineer’s report to address issues such
the project/issuer (e.g. revenues, costs,)
affected by the technical risk. as: capacity, availability, expected outages, repair and maintenance levels, future required
Source: Fitch capital investments, spare part requirements, expected efficiency levels, and environmental
issues (see Use of Expert Reports section). Similar issues apply to connecting technology. See
the Infrastructure Development and Renewal/Obsolescence/ Economic Life section.
Decommissioning, Handover, License Renewal Risks

Significant and unique financial risks may occur in the final years of a project when it comes to
the end of its life (such as reduced productivity or decommissioning), contractual obligations
(such as handover), or renewal of licenses, leases, or concessions. Decreased revenue or
increased capital expenditure may occur with an associated rise in default risk.
Fitch will assess the impact of these late costs on the debt service profile. Structural features
such as grace periods, reserves (such as forward looking maintenance reserve accounts), and
forward-looking cash sweep tests are often included in the structure in such cases. The
financial analysis will include stresses for affected revenues and costs (see the Counterparty
Party Risk section). Unquantifiable costs associated with decommissioning a facility would limit
Fitch’s ability to rate a transaction if such costs were incurred while the rated debt is
outstanding, or where refinance debt is anticipated, during the term of such refinance debt.
Revenue Risk
Gross revenue of a project is typically driven by a combination of availability, price, and volume.
Risk arises if output or service cannot be adequately provided or if demand for the output or
service does not exist at a price at which the project is able to meet its operating expenses and
service its debt. The sources of revenue are typically either one or a few payers such as a
concession grantor or a contractually obligated power purchaser; one or more major off-takers,
such as a utility, airlines or shipping companies; or a significant number of users such as cars
and trucks on toll roads. Fitch will evaluate the relative stability and predictability of cash flow to
the project when considering its ability to service its debt and specifically, the revenue
framework, performance requirements, and exposure to demand for its services, which shape
the overall revenue profile.
Revenue Framework
Exposure to demand risk varies widely across projects. Some projects have fully contracted
revenue streams that provide cash flow, provided the facility is available. Because projects with
fully contracted revenues, such as availability-based concessions and energy facilities with
tolling agreements, are less exposed to demand risk, the analysis focuses on the other relevant
risks. These include risks relating to performance against contract terms (availability,
throughput, and efficiency) cost risk and counterparty risks associated with the off-taker or
concession grantor. However, some specific transactions feature a mix of different revenue

August 2017
risks that require further analysis of volume or price risk, such as energy facilities with partially
contracted and partially merchant-based revenues, or shadow toll arrangements. These
combine usage risk with a single concession payer. Fitch also considers whether mechanisms
for determining revenues are clear and objective, reducing potential for dispute.
Performance Requirements
Contracted revenue may vary with the quality of the project’s output, availability of the facility,
timeliness, or quantity/efficiency of output. Failure of the operator to achieve required standards
typically results in a reduced price or penalties deducted from a fixed-concession payment (see
the Operation Risk section). Where penalties are incurred by the project vehicle due to
subcontractors, connecting infrastructure, or suppliers, Fitch will evaluate the borrower’s ability
to pass through such penalties under the subcontract. As with other compensation payments,
including any from an off-taker, counterparty risk may be material.
Broader Demand Risk

Some projects will be more exposed to demand risks, such as toll roads or merchant facilities
producing power without any contractual support in place, or with support for a term less than
the debt maturity. For many infrastructure facilities and projects, a contractual or regulatory
framework will establish the basis upon which revenues are generated, but expose the facility
to demand risk to some degree. Fitch will evaluate the mitigating factors of volume and price
risks present in any such contractual or regulatory framework, taking into account the facility’s
competitive position. Some infrastructure facilities have a monopoly on the provision of
essential public services and face limited competition. Others may face competition from
nearby facilities even though a local monopoly has been granted.
When evaluating debt for facilities fully or partially exposed to price and/or volume risk, volume
and price projections established by the project’s sponsors supporting the project economics
are reviewed. As part of this analysis, Fitch will request and review any reports or studies
conducted by a third-party expert on behalf of the issuer. Such studies, together with historical
price and volume trends, market, and macroeconomic forecasts and peer analysis, where
available and appropriate, are used to assess the likelihood of price and volume combining to
achieve expected revenues.
Fitch may also use its own forecasts and assumptions (e.g. oil and gas price forecasts). The
use of historical information will depend on its quality and evidence of its predictive value.
Historical information is likely to be more relevant for established projects and markets where
specific performance data are available. Fitch views assumptions or estimates based on such
performance information as more reliable. Volume and price risk factors identified as drivers of
Rating Case Input gross revenue are stressed as part of the financial analysis (see the Financial Profile and
Rating Case section). Like for like, Fitch would expect projects exposed to price or volume risk
to have the capacity to survive higher sensitivities than those shielded from such risks by
contract.
Judgement
Other Considerations
When gross revenues are determined under a contractual or regulatory framework, Fitch will
Attribute consider the relative dependability of any legal and regulatory incentives necessary to sustain
the revenues; see Country Ceiling and Dependability of Legal Regime.
Assumption The attributes in table below present the approach to assessing revenue risk on a qualitative
basis under the master criteria. Where useful to sharpen the focus of the analytical approach,
individual sector criteria may treat attributes relating to volume and price separately.
Attributes on Revenue will directly drive

the magnitude of stresses included in the
rating case. They will also inform the
choice of sensitivities and the
Source: Fitch

August 2017
Revenue Risk Characteristics

Stronger attributes Availability-based revenue from counterparty with strong financial capacity; limited
deduction risk; limited delivery risk; fixed tariff “take-or-pay” contracts with strong
financial counterparties exceeding rated debt life; no currency mismatch between
revenue and costs; minimal reliance on demand or resource forecasts; low-cost
producer; demand at market prices; strong historical evidence of revenue patterns;
lower volatility user-based revenues; diverse customer base; proven ability to pass
on inflationary price increases.
Midrange attributes Availability-based revenue from counterparty with midrange financial strength; off-
take agreements (with price risk) with midrange financial counterparties; moderate
deduction risk; market convention delivery risk; partial currency hedging; reliance on
low volatility or proven resource forecasts; established long-term subsidy regime;
competitive market position; moderate ability to pass on inflationary price increases.
Weaker attributes Availability-based revenue from counterparty with weaker financial strength; full
exposure to market risks (price and volume); existing or expected competing
facilities; significant deduction risk; special delivery risks; currency exposure;
potential for increased royalties, windfall taxes or production limits; reliance on
demand forecasts or resource forecasts of higher variability; politically sensitive
subsidy regime; complex definition of output; limited ability to pass on inflationary
price increases.
Source: Fitch
Infrastructure Development, Renewal/Obsolescence, Economic

Life
Infrastructure Development and Renewal
Rating Case Input
For debt to be rated, its maturity should be within the expected economic life of the asset or
concession contract. Essential public infrastructure assets typically have longer life or the
issuer has a franchise of indefinite duration (e.g. freehold ownership), subject to proper asset
Judgement development and renewal efforts.
To the extent that the expected economic life of a facility is achievable only through significant
capital expenditure, the regulatory or contractual framework will typically require that the
Attribute
necessary works be carried out. In some cases, this may be accomplished indirectly by a
requirement that facility availability and output be maintained at a level attainable only through
Assumption periodic capital expenditure. Fitch will seek to understand the management’s/sponsor’s
approach to the capital programme, including planning, funding, management, and the process
for developing any relevant stakeholder consensus.
Attributes on infrastructure renewal will Fitch will evaluate the extent to which the costs of infrastructure renewal can be recovered from
directly drive the magnitude of stresses revenues on a pay-go basis, or with periodic automatic adjustments of revenues as is the case
included in the rating case. They will also
inform the choice of sensitivities and the in certain regulatory frameworks. Both cases would be credit positive. In many cases
Source: Fitch
infrastructure renewal will be initially financed through borrowing. The impact of expected
additional debt to fund infrastructure renewals can be captured in the rating through the
projections in the financial profile, including the uncertainty of future debt terms to finance the
investment.
Evaluating Infrastructure Development Execution Risks

Operators of existing facilities may take on the role of general construction manager for
improvement projects. Fitch regards a comprehensive engineering, procurement and
construction (EPC) contract as a reasonable way of mitigating delay, plant performance and
cost overrun risks. Completion risk could be mitigated where an owner/constructor model is
employed through an appropriately sized budget, contingency and an adequate owner with
relevant experience and may include some level of completion guarantee from a credit-worthy
counterparty.
Improvement projects at operating facilities require managers to handle myriad challenges.

Less emphasis will be placed on evaluation of the contractor and more on the infrastructure
management’s track record with such construction projects and its capacity to manage these
risks and any resulting costs within the Issuer’s existing credit profile. The presence of a facility

August 2017
management team with a history of delivering capital projects on schedule and within budget is
a substantial mitigating factor to contractor exposures and is considered a stronger attribute, as
is a well-phased capital programme that can be modified to reflect changes in need or demand.
Operators of large existing infrastructure facilities, such as airports, seaports, and toll networks,
tend to use turnkey fixed-price contracts less frequently, preferring to manage timing,
completion, and cost risks themselves. In these cases, Fitch will review the capital
improvement and construction planning with management to assess the risk that cost overruns
and delay may pose to the credit profile of the facility debt. The issuer’s ability to continue to
earn revenue and its ability to absorb costs over budget and costs resulting from delayed
completion will be a focal point.
Obsolescence and Economic Life

Obsolescence risk due to more efficient variants, competing innovation, or demand shift is
considered against mitigating factors available to the issuer. Fitch will evaluate the capacity of
the project to invest in upgrades to maintain competitiveness and generate revenues in base
case and stress scenarios. Fully contracted frameworks (e.g. power purchase agreements) and
large public infrastructure assets are less exposed to obsolescence risks as contractual
mitigating factors may exist via concession grantors, off-takers, or suppliers. Obsolescence risk
without mitigating factors may result in Fitch assuming a shorter economic life and lower
revenues in its financial analysis (see the Financial Profile and Rating Case section).
Infrastructure Renewal and Obsolescence

Stronger attributes Strong mechanisms for capital planning and funding; demonstrated history of effective
management; debt maturity significantly within proven economic life; established but
current technology; capex evaluated by third-party engineer as reasonable.
Midrange attributes Adequate mechanisms for capital planning and funding; successful history of
managing capital programme with some inconsistency or shortfall; one- to two-year
economic tail after debt maturity; no evidence of emerging competing technology or
potential demand shift.
Weaker attributes Weak planning mechanisms, history of deferred maintenance/cost overruns; economic
life nearly co-terminus with debt maturity; emerging competing technology, e.g. lower
cost or substitute.
Source: Fitch
Termination Compensation Risk

Asymmetric Risk
Project Company Default
The risk of early termination of any key contract due to an event default of the project company
Upside is addressed in all other sections of this criteria report. Concession contracts have varied
provisions for termination compensation payments to be made following a default by the
concessionaire in operating the related facility. Similarly, offtake agreements supporting energy
related project debt may provide for termination if production or availability levels fall below
Downside certain critical thresholds. The amount and timing of payment are matters affecting recovery
prospects for investors and are not considered in the rating of the issuer’s related debt.
Termination at Grantor’s Option

The grantor of a concession or an offtaker may retain an option to terminate the concession or
Weaker features on termination the offtake agreement for among other reasons, its own convenience, for regulatory purposes
compensation would severely affect the
rating or make the issuer/transaction or for public necessity. The probability of exercising such an option cannot be adequately
unrateable. The asymmetric nature of this
risk is reinforced by Fitch’s definition of
factored into a rating. If the risk of early termination in cases other than a project default is not
ratings, which focus on Probability of covered by an appropriate and timely compensation payment (ie sufficient to cover the full
Default (not on recovery)
Source: Fitch repayment of rated debt instruments and paid in a timely manner to avoid a default), the
transaction may not be rateable.

August 2017
Termination Compensation Risk

Neutral to the Termination events without any Issuer default (force majeure or grantor option)
Rating compensated to repay rated debt on a timely basis; adequate grace periods lender
step-in rights.
Negative to the Foreseeable termination events; compensation following termination other than for
Rating or obstacle borrower default (force majeure or grantor option) may be less than debt or unclear;
to assignment of a renewal risks.
rating
Source: Fitch
Macro Risks
Country Ceiling and Dependability of Legal Regime
Country risk analysis for a project finance transaction starts with Fitch’s sovereign rating and
Country Ceiling for the project’s host country, reflecting the default risk on sovereign obligations
and the transfer and convertibility risk, respectively. If Fitch does not rate the country, it will
perform an assessment of the credit quality of the sovereign. Absent specific transaction
features mitigating country risk, the Country Ceiling imposes an upper limit on the rating of
project debt but they do not capture all project country risk. External support or financial
structuring may mitigate transfer and convertibility risk for individual debt instruments (see Debt
Structure). Fitch does not rate for a change in law, regulation, or tax. Nevertheless, the rating
analysis will consider some of the qualitative factors and historical information about how
material these risks can be.
In addition to the sovereign rating and Country Ceiling, Fitch reviews the political and regulatory
environment in which the project is being constructed and operated. A stable and predictable
environment for a project is evidenced by the government’s commitment, public support, and a
consistent application of law and regulation.
Political risk is the risk of changes to laws, regulations or concession contracts governing the
operation of infrastructure companies during the life of the asset. It may take the form of unilateral
contract variation, specific regulatory actions, exceptional taxes or royalties, forced changes in
ownership or control, or outright expropriation Such political interferences are considered ‘Event
Risk’ or ‘Extreme Scenario’ and because they cannot be predicted and quantified, they cannot be
included in rating cases. This risk is therefore not reflected in the rating.
However, the risk that a regulator modifies some terms of the economic equation of a project
within its normal powers and duties to determine such parameters (e.g. energy tariffs, tolls or
charges), is reviewed and captured in the analysis through other Key Rating Factors, notably
the Revenue Risk (in particular through its price element).
Asymmetric Risk
A country’s general economic condition may not be directly reflected in its sovereign rating or in
state/provincial ratings, particularly where there is low debt and strong cash flows from
Upside exploitation of natural resources, although there is usually a similar trend. Infrastructure may be
weak, skilled labour in short supply, utilities unreliable, and so on, all of which may affect the
project and hence the debt ratings.
Downside
Country Ceiling and Legal Regime
Neutral to the Country Ceiling above the issuer’s intrinsic rating; creditor-friendly and reliable legal
Rating system; history of impartiality and respect for contracts; long-term stable economy;
supportive regulatory regime; project of national importance or essential for public
good or services.
Negative to the ‘Speculative grade; jurisdiction potentially unreliable or not supportive of creditor
Rating rightsa; interventionist tendencies; political or economic instability; endemic delays for
stresses applied on the relevant aspects of permits; public opposition; history of fines or disputes.
the project/issuer (eg revenues, costs,) a
May include reference to Fitch emerging markets reports or external sources, e.g. World Bank
affected by the Country risk
Source: Fitch
Source: Fitch

August 2017
Industry Risks
The agency considers the project in its immediate industry sector in terms of relative
competitive position, overall supply, and demand and the general outlook. This includes not
only similar projects but other industry participants such as corporations, state-owned
enterprises, and not-for-profit organisations. For this and general industry outlooks, Fitch will
rely on its corporate or public finance groups. Barriers to entry or the essential nature of the
sector are considered both at a global and local level, including industry-specific regulatory
regimes or rules. Closely related industries encompassing suppliers, users, or potential
competitors are examined. The nature of demand (essential versus discretionary) is also
analysed and are reflected in revenue generation analysis. An assessment of the industry may
not be relevant for all sectors (e.g. toll roads and bridges).
Event Risks
When evaluating project finance and infrastructure transactions Fitch explicitly considers the
potential event risks that may adversely affect the issuer’s ability to repay the debt. Event risks
arising from natural hazards  floods, earthquakes, hurricanes, tornadoes  as well as human
error or mechanical malfunctions  industrial accident, explosions, forced outage  are
identified and the management of the relevant risks evaluated.
Comprehensive insurance, including business interruption insurance, is a typical tool used by

private sector issuers. Insurance for many of these risks is commonly available, subject to some
repricing risk and the rating considers that the issuer will be able to meet a covenant to have in
place required insurance coverage consistent with market standards from qualified insurance
providers.
In some instances, events will be determined to be “uninsurable,” meaning insurance of the

related risk is unavailable, unavailable in sufficient amounts, or completely uneconomic.
Terrorism in most jurisdictions is one such risk; earthquakes in some jurisdictions are another.
Where a project or infrastructure asset is exposed to uninsurable risks, a second level of

analysis is required to determine whether mitigation is required for the rating and, if so, whether
there is an alternative to insurance that mitigates the risk of default to a degree commensurate
with the rating of the debt.
Whether mitigation is required depends on a qualitative assessment of the project’s

vulnerability to the identified risk. As an example, flood insurance is not needed for a project on
a hill and the absence of such insurance would not be a rating constraint. Fitch considers
terrorist activity to lie outside the scope of ratings in infrastructure and project finance as a
general rule. Similarly, the application of revolutionary technology or the long-term effects of
global warming are not predictable and are not captured by the ratings until they become
predictable or have materialised.
Where it is determined that the project has vulnerability to a risk, mitigating factors other than
insurance will be evaluated. Some issuers have multiple assets and analysis may consider a
single event unlikely to affect all assets to such an extent that it would hurt timely payment of
debt.
In some cases, risk mitigation may be accomplished by transferring the risk to a third party. For
example, a public authority may grant a concession in a public private partnership transaction,
yet retain the risk of uninsurable force majeure risks, including limited insurability that results
from uneconomic pricing of such risks.
In other cases, the nature of the infrastructure asset is such that the asset function might be
impaired, but it could continue to operate at a substantial level and recover costs of rebuilding
through the applicable tariff mechanisms. The debt will not be affected so long as there is
sufficient liquidity to get through the immediate impact of the event. In some cases, risk

August 2017
mitigation will not be sufficient and the rating may be capped below an investment-grade
threshold depending on vulnerability to the uninsured risk.
Debt Structure
In contrast with project analysis, which considers the capacity of the project to generate cash
flow and the stability of those cash flows, the following financial analysis considers each rated
debt instrument separately, taking into account the quality of its individual debt characteristics,
structural features, security rights, and any external support. Fitch rates infrastructure and
project finance debt instruments in accordance with their terms and conditions. In particular,
credit is given to structural elements that provide financial flexibility; for example, deferrable
debt service of a junior tranche will be favourable to the senior tranche.
Debt Characteristics and Terms

The characteristics of a debt instrument, including its maturity, amount, and currency, are
sourced from the loan agreement or bond documentation. In some instances, a term sheet,
prospectus, or representations from issuers may be relied on. The obligation to pay interest,
including rate basis, margin, payment dates, grace periods, and whether interest may be
deferred and the obligation to pay principal according to an amortisation schedule, are
established together with the priority of these payments. This analysis is undertaken for each
debt level in the financing.
Rating Case Input Issue default ratings on tranched debt securities can be distinguished only where there is a
basis in the finance documentation and legal framework to support a conclusion that a default
on one tranche will not result in a payment default on other senior tranches. Issuer Default
Ratings could be assigned; an IDR generally reflects the risk of default on all of an issuer’s
Judgement financial obligations, whether or not they have distinguishing security features. The existence of
a cross default or cross acceleration mechanism or a legal framework that could result in a
cessation of payments on all tranches following commencement of an insolvency proceeding
Attribute would prevent distinct default ratings.
Assumption
Debt Characteristics and Terms
Stronger attributes Senior-ranking debt  interest and principal; fully amortising debt; no de facto
subordination; scheduled amortising principal commencing after completion; interest
deferral on junior debt; no cross-default or acceleration; fixed interest rates.
Midrange attributes Senior-ranking debt (occasionally junior-debt) interest and principal; within senior-
Attributes on Debt Structure will directly
drive the magnitude of stresses for interest ranking class but other debt within that class may mature earlier; amortisation may
rates refinance risk included in the rating have limited interest-only period or some flexibility; some floating-rate debt.
case. They will also inform the choice of Weaker attributes Non-senior debt; highly sculpted amortization; bullet maturity; junior interest in priority
sensitivities and the interpretation of to senior principal or reserves; cross-default and acceleration; significant floating-rate
break-even results exposure.
Source: Fitch
Source: Fitch
The terms of the instrument are reviewed keeping in mind the balance between protecting the
investor and maintaining the issuer’s operational and financial flexibility. Fitch considers
whether the terms of the issuer’s other debt instruments affect the rated instrument. Rights and
control may only be of value when the rated instrument is in the controlling creditor class.
In some cases, this could translate to a higher default probability as senior debt holders may
act in their exclusive interest. This could be to shut down junior debt or accelerate the full debt
structure if they feel there is enough cash for them to be repaid in case of liquidation. Where
this provision exists, analytically the default risk for junior debt will occur where the senior
holders are empowered to act even if it occurs before an actual default of payment on the junior
debt. In such cases the junior debt rating may be lower than suggested by financial metrics.

August 2017
Structural Features
A debt instrument may benefit from structural features that underpin the cash flows supporting
debt service. These may include covenants and triggers to trap or divert cash based on
financial ratios, which may be to the benefit or detriment of the instrument, usually depending
upon its priority. General covenants are expected to restrict additional debt, restrict payments
to sponsors or equity holders, and typically retain cash for future periods, when financial
indicators are deteriorating, to benefit creditors. Covenants that redirect available funds to
senior debt at the expense of junior debt are seen as positive for senior debt and negative for
Asymmetric Risk junior debt. This redirection will be evaluated in the financial analysis, notably through the rating
impact of stress cases. Such features can be reflected in rating distinctions between tranches
Upside
where supported by an appropriate legal framework.
Cash diverted or retained is typically allocated to reserves or principal reduction of the most
senior debt. Contractual arrangements often exist between creditors to determine the priority of
Downside payments for costs, fees, swap payments, interest, and principal (payment waterfall). Fitch will
review payment waterfalls to see if they are consistent with other assumptions, if they are
reflected in the applicable cash-flow model, and under what circumstances they may change.
Debt service reserves, events of default, or covenants transferring control are assessed; see
the Financial Profile and Rating Case section.
Weaker features would require a higher
financial headroom (e.g. better coverage) Liquidity lines typically provide independent issuer-level protection direct to rated debt, against
to achieve a given rating level within a
context of sector guidance or peers interruptions in operational cash flows. Issuer-level working capital and reserve facilities are
Source: Fitch typically independent of short-term project performance and drawable with minimal
conditionality. These are evaluated as drawn facilities when considering prospective leverage
where advances occur in the rating case.
Structural Features
Neutral to the Rating Dividend lock-up and cash sweep triggers; access to debt service reserves, sinking
funds or capex reserves; reserve replenishment.
Negative to the Rating Weak dividend lock-up; no cash sweep; junior or no access to reserves; no reserve
replenishment.
Source: Fitch
Asymmetric Risk Derivatives and Contingent Obligations

Fitch will evaluate the debt structure to identify liabilities from other sources, including
derivatives, working capital lines. Swaps are most commonly used to hedge interest costs but
Upside
also to mitigate foreign exchange, inflation, or other risks. Where the notional amount to be
hedged is variable or a direct hedge is not available, mismatching of basis, maturity, or notional
may leave open or over-hedged positions. In such cases, Fitch will evaluate interest rate or
Downside
foreign-exchange stress to evaluate the capacity of the issuer to meet debt service with higher
costs or lower revenues. Inflation and interest rates are inputs into the cash flow model, for
which the assumptions (e.g. rate levels) are independent of the transaction. The hedging
structure will be reflected in the outputs.
Hedging policies could efficiently reduce exposure to rate risks, but will be assessed within the
Rate risks or contingent obligations could analysis of counterparty risks (see Counterparty Risk).
make the transaction unratable
Source: Fitch
Derivatives and Contingent Obligations
Neutral to the Rating Revenues largely hedged to debt service for currency, and interest rates for the
relevant tenor. No material contingent obligation.
Negative to the Rating Significantly imbalanced hedging or unhedged financial risks or material
contingent obligations
Source: Fitch

August 2017
The issuer may be required to post collateral under supply or off-take contracts to cover
replacement revenues to the counterparty if the facility experiences outages. The source of
collateral posting or replacement letters of credit will be evaluated to determine the issuer’s
ability to perform this obligation under the relevant contract. (See Financial Profile and Rating
Case section).
Security Package and Creditor Rights

The benefits of security or creditor rights to the rated debtholders can be seen in reducing
either the likelihood of default or the loss severity given a default. However, it is only the former
benefit that is considered when assigning an infrastructure and project finance rating. Where a
jurisdiction permits, the granting of available security (over key economic, financial and
intellectual assets) in favour of debtholders is viewed as conventional.
Post enforcement, Fitch would assess whether security interests in key project assets and
contracts attach in the same rank order as debtholder priority and confer controlling rights prior
to enforcement. Pre-enforcement controlling rights potentially reduce the likelihood of default
and are typically the more significant rating aspect of the security package. Step-in and other
rights providing senior investors with the ability to protect key contracts and assets or to initiate
replacement of failing transaction parties would be expected together with security interests
granted by project owners over their ownership interests in the issuer.
Comprehensive inter-creditor agreements limiting the scope for individual pre-emptive action
and defining the pre-enforcement controlling class of creditor may reduce uncertainty about
project assets in adverse circumstances. Much of this requires a reliable and creditor-friendly
jurisdiction. Control of material insurance proceeds, either to ensure project reinstatement or
debt repayment, is also considered an important feature. Differences in rights between classes
to control remedies following default are noted when rating each class of debt.
Transactions with misaligned creditor rights are viewed negatively. For example, a bank-bond
or equivalent structure where banks provide delayed draw flexibility and bonds have been
funded at financial close have the risk that banks that have not at least partly funded their
commitments may be less incentivized to continue to fund when a problem in construction
Asymmetric Risk occurs. Fitch would positively view a provision that better aligns interests (for example, by
stipulating that voting rights be limited to the share of funds paid into the project). (See
Counterparty Risks section).
Upside
Security Package and Creditor Rights
Neutral to the Rating Senior-ranking security interests overall operating and intellectual assets,
contract rights, and cash balances; first payee of material insurance proceeds;
Downside contract step-in rights; creditor-friendly jurisdiction; first security interest in shares
of project company; controlling class; early transfer of cash control from operator
to trustee.
Negative to the Rating Non-senior-ranking security interests or subordinate position via security trustee;
significant or unquantifiable statutory super-senior creditors; untested or cross-
jurisdiction collateral structure; no post-enforcement control; transfer of cash
control post default, misaligned interests within controlling class.
Weaker features on security package Source: Fitch
would result in lower rating for a given
financial profile
Source: Fitch

August 2017
Rating Case Design

Refinance Risk
Fitch views projects exposed to refinance risk, when debt is not fully amortised at maturity as
structurally weaker, as the ability to access the market and the future cost of debt are uncertain.
However, for debt instruments, which benefit from substantial amortisation, significant residual
Judgement project value or structural mechanisms that ensure an alternative repayment mechanism to
facilitate refinance, rating impact may be limited if any.
Attribute Fitch will analyse refinance risk, using stress assumptions for costs and liquidity derived from
historical patterns in the relevant debt market. See Financial Profile and Rating Case section.
Assumption Refinance Risk Characteristics

Stronger attributes Marginal or no bullet debt in the financing structure; nominally some bullets, but rating
case cash flows show no or limited balance at nominal bullet maturity.
Midrange attributes Moderate use of bullets (less than 25%) with substantially fully amortizing debt or
large issuer with established market access and active management of several bullet
Attributes assigned on Refinance Risk
maturities.
drive the magnitude of stresses included in
the rating case. They will inform the choice Weaker attributes Substantial use of bullets and dependence on refinance analysis, unproven market
of sensitivities and the interpretation of access, concentrated maturities.
break-even results Source: Fitch
Source: Fitch
Financial Profile and Rating Case

Fitch assesses the capacity of the cash flow to repay each rated instrument by applying a
range of stresses and taking into account the features of debt structure. The creditworthiness of
both operational and financial counterparties, in the context of their obligations, is also
incorporated into the rating. Peer analysis will be used wherever appropriate and if ratings for a
relevant group of peers can be compiled.
Assumptions
The credit analysis will provide a list of the most relevant quantitative and qualitative
assumptions comprising the base or rating cases. The case assumptions will generally relate to
the key rating drivers, as identified for the sector or a specific credit. The analysis will describe
how the selected macro-economic, business, or financial assumptions relate to the credit
drivers and how they have been adjusted to fit within the logic of each case.
Assumptions can be credit-specific, such as the heat-rate for a thermal power project. In such
cases, assumptions could be based on external sources, such as technical advisors and peer
data. Assumptions can directly or indirectly relate to macroeconomic forecasts and projections
provided by other analytical departments within Fitch, such as inflation, oil prices, or GDP, or by
external reputable providers.
Base Case
For most projects and issuers, Fitch will establish a base case that results from expected
performance in a normal economic environment. This is informed by various sources of
information, like historical performance, issuer projections, third-party expert reports, as well as
Fitch’s criteria and expectations (including Fitch’s macro-economic assumptions These are
focused on measuring financial and operational flexibility in the economic environment
expected for the relevant forecast period. The agency’s analytical assumptions specific to the
project will be incorporated.
Performance Stress
Having established a base case, Fitch applies a series of stresses to parameters identified as
key in the analysis. Parameters such as delays, input and output prices, demand or utilisation
levels, performance, life-cycle, and other costs may be stressed, either in value or in timing.
The cash flow impact of structural or legal changes may be estimated and remodeled. The
purpose is to test the sensitivity of cash flows available to each rated debt instrument to
changes in these parameters.

August 2017
Certain key project variables may be hedged, either contractually or through natural positions.
Fitch considers the effectiveness of such arrangements and any remaining risk from imperfect
hedges (basis risk) or residual unhedged positions may be the subject of stress tests. The
magnitude of stresses applied may be informed by assessment of volatility reflected in key risk
factors qualitative assessments, historical data, third-party expert reports, and sector criteria
where applicable.
Financial Risks Stress

Financial stresses are considered in a similar manner to project stresses; some may only apply
to individual rated debt instruments. Common financial stresses such as inflation, interest rates,
and foreign exchange rates may be hedged or partially hedged. In such cases, the result of a
stress may be a material increase in counterparty risk against the protection seller. Financial
stresses may include the potential default and replacement of any counterparty with a material
financial obligation to the borrower or issuer SPV. The amount of financial stress applied is by
reference to scenarios from an appropriate analytical group within Fitch, such as the
Sovereigns group for macro indicators, eg interest rates, GDP or inflation.
Interest-rate stresses on variable interest-rate debt, for example, may be considered in the
rating case or breakeven scenarios and will be based on historical patterns in the relevant debt
market. The stress will be applied in the direction adversely affecting cash flows for the rated
instrument. Due consideration will be given to the effects of a possible corresponding rise in
inflation: for issuers whose cash flows are related to inflation, the resulting stress may be
expressed in a hike in real interest rates rather than nominal rates. Where appropriate, the
stresses will be considered under the report, Criteria for Interest Rate Stresses in Structured
Finance Transactions and Covered Bonds.
For refinance risks, Fitch will evaluate the impact of higher costs of capital at the time of
refinance, depending on the time to the refinance date, the history of the issuer’s access to
market and the pattern associated with similarly situated issuers. The stresses will range
between 200 and 400 basis points.
Rating Case
The combination of the base case and the selected performance and financial stresses will
result in a rating case. The distance between the base case and the rating case will represent
the degree of stress that Fitch deems commensurate with the volatility or uncertainty identified
for the project or issuer’s activity. For project or issuers featuring little uncertainty or volatility,
this distance (measured in the magnitude of applied stresses and thus in the credit metrics)
would be smaller.

August 2017
The rating case includes some reasonable downside and does not reflect extreme stresses,
which would be addressed through separate sensitivities (see below). However, the rating case
includes the fluctuations due to a normal economic cycle, and therefore should be consistent
with the expected bottom of the cycle. When selecting stresses, the sensitivity of cash flows to
changes in the stress is considered to achieve a degree of rating stability through the economic
cycle, including a typical downturn. Downturns are an expected event and the purpose of this
rating case is to signal the nature of an event through which the rating will be stable. The rating
case may vary the commencement of the downturn to assess the effects on the credit if a
downturn occured at a more vulnerable time for the related project or infrastructure asset.
When revenues are based on contracts that mitigate volume risk, such as take or pay
agreements or PPP contracts, cash flow stresses will focus on the elements in the cash flow
that can vary such as production efficiency and operating costs. For example, a wind project or
solar facility will be evaluated based upon revenues at a low output due to low resource
availability.
For issuers that are exposed to demand risk, the rating case will emphasize Fitch’s through-the-
cycle approach to ratings and evaluate the demand and consequent revenue stress that a facility
may be expected to experience in an economic downturn of reasonable depth and duration.
The rating case includes the anticipations of structural changes, for example, if the underlying
demand for a given facility has changed in a durable manner, reflecting secular trends
expected to permanently shift the performance up or down compared with previous
expectations. If Fitch identifies a sustainable change in the long-term trend, this would be likely
to require a material change in the rating case and result in a rating change.
Events of longer duration or depth, or performance below expectations within the rating case
scenario would put ratings under pressure.
The choice of the rating case is a key quantitative and qualitative determinant of the rating and
is typically a central point of discussion in rating committees.
Sensitivity and Break-Even Analysis

In addition to the rating case, Fitch may consider a combination of other project and financial
stresses, or a series of individual stresses, based on the base case in the context of history,
peer analysis, and Fitch’s expectations. These may reflect a particular scenario of events. They
Break-Even Design are used either by selecting base case metrics providing relevant cover or by modeling the
Break-even calculations are designed stresses to test that the rated instrument does not default.
to tangent a default on cash payment
(not on covenanted default triggers) The method employed for a particular sector is usually determined by the information available
and usually include drawings on debt and the importance of peer analysis, which often relies on metrics.
service reserves. Break-even scenarios
are calculated off the base case and Models
are of two types: Models used in project and infrastructure finance are generally cash flow models projecting
 a one-off change in a given operational cash flows and debt service, based on assumptions input as variables. These
variable resulting in the 1.0x models are not stochastic, and only allow single or combined factor sensitivities to assess the
DSCR (see definition below). possible impact on debt service. Model outputs are only one factor in a Fitch analysis; a project
 The most adverse constant for which credible projections show a strong ability to repay rated debt may still be assigned a
growth or decline rate over the speculative-grade rating if some more qualitative risks (for instance, payor counterparty risk,
life of the rated debt, which country risk, sponsor insolvency, or industry risk) are deemed material.
produces a minimum 1.0x DSCR
(see definition below). Due to the idiosyncratic and complex nature of most projects and issuers, Fitch often uses
third-party models provided by the issuer and its agents. The agency judges that adapting a
standard model to reliably incorporate the many individual features of a project or issuer is not
justified; instead we focus on analytic drivers, such as choice of stress, and use an issuer’s

August 2017
project-specific cash flow spreadsheet models and tools to evaluate these drivers. Fitch may
also use internally developed models and tools where relevant.
The agency also considers the plausibility of results from external cash flow models, by
examining trends and sensitivities, making estimates and adjusting individual parameters.
Despite these precautions, as with all types of information provided by issuers, Fitch is
incumbent on sponsors or issuers ensuring that the information is timely, accurate, and
complete. Failure to do so may result in the withdrawal of ratings. Fitch considers it best
practice that external cash flow models are independently checked, ideally by a reputable third
party.
Metrics
The results of these stresses are typically summarised by using various metrics, often in ratios
and are used in combination. Metrics are used selectively as appropriate to the sector or
transaction structure. Metrics associated with a given rating category can vary widely
depending on the nature of the project and the potential volatility of cash flows. Any sector-
specific criteria will include medians and ranges typical for the relevant sector. Such metrics are
an input in determining a rating to the extent that they summarise in a single number Fitch’s
views on certain risks and, in particular, their impact on a project’s cash flows. A rating includes
both qualitative and quantitative analysis. Stronger or weaker financial metrics will be viewed in
the context of the qualitative analysis of risk attributes described in this master criteria.
Common among metrics are the following listed below.
Debt Service Coverage Ratio (DSCR)

This ratio measures the amount by which cash flow available for debt service (CFADS)
exceeds debt service (interest and principal) in any given period. Periods can be annual or
intra-annual, especially for projects exposed to seasonality. Both minimum and average
periodic DSCRs are taken into account in the analysis as they indicate the volatility of cash
flows. The profile or evolution of the DSCR is considered in the context of the relative increase
in uncertainty for many variables overtime.
Leverage Ratio
This is the ratio of net debt to CFADS or net debt to EBITDA used when evaluating
infrastructure entities with an unlimited franchise to provide essential public services, or when
debt is not amortising.
Project Life Coverage Ratio (PLCR)

This is the net present value (NPV) of CFADS over the remaining project life, plus initial debt
service reserve account (DSRA) and other available cash, divided by the principal outstanding
on the rated debt instrument (plus all equal-ranking and senior debt) at the calculation date.
Project life will refer to the remaining economic life of the asset. Where a concession is granted
that runs for a term less than the expected economic life of the asset, such as in certain social
infrastructure PPP financings, the remaining project life can be the remaining life of the
concession term. In cases where the remaining life of the concession is long, Fitch substitutes
an economic project life depending on the nature of the asset, since it becomes impractical to
evaluate project cash flows for a longer period.
The PLCR is a useful alternate metric to the LLCR in situations where long-term debt is not
available, and where cash-flow coverage is too narrow to retire debt over the shorter available
debt life. The PLCR looks at the economic capacity to retire debt over the economic life of the
project. The discount rate used to calculate the NPV of CFADS will typically be the coupon on
the debt, but where refinance risk is analysed, can incorporate varying assumptions about the
cost of capital. See Refinance Risk.

August 2017
Loan Life Cover Ratio (LLCR)

This is the NPV of the CFADS from the calculation date to the maturity of the rated debt
instrument, plus the initial DSRA and other available cash, divided by the principal outstanding
all pari passu and higher ranking debt at the calculation date. Cash flows are discounted at the
weighted-average cost of debt to maturity. Residual values at maturity are excluded unless
specifically structured to be liquidated. This metric measures the total capacity for debt service
over the life of the rated instrument.
Peer Analysis
Where information on appropriate peer projects for which a rating has been assigned is
available to Fitch (usually for the same sector, region, and structure), this will be used for
comparative analysis of individual risk factors (both qualitative and quantitative) or in
establishing the rating, with respect to the peer group. Projects in different sectors or with
different structures may present different qualitative features and credit metrics at a similar
rating level due to factors such as legal framework, stability of cash flows, or structural features,
making comparisons of less value. Peer analysis is likely to play a more important role in
sectors where the portfolio of ratings is more developed. Fitch may use normalising
assumptions (such as a common annuity-based amortisation schedule) to better compare rated
debt with peer projects.

August 2017
Surveillance
The likely adequacy and frequency of ongoing information will be considered at the time of the
initial rating, to determine the prospects of an appropriate standard of surveillance being
maintained.
Fitch monitors and reviews existing ratings in accordance with this criteria and applicable
sector criteria for the type of rating. Fitch reviews periodic information on a project, in addition
to that received at inception - such as financial statements/management accounts,
performance data, technical reports, construction progress reports, budgets, and forecasts - at
least once a year until maturity of all rated debt.
Once received, this information is screened for materiality and consistency with the expected
case. A decision is then taken whether to initiate a full review of the rating. Significant market
events, changes in counterparty ratings, or changes in law or regulation may trigger a full
review. Full reviews are undertaken periodically in any event as required by Fitch policy.
Information received as part of the surveillance process may lead to requests for further
information and revisions in Fitch’s base and stress cases (either quantum or factors).
Rating Sensitivities
Fitch's opinions are forward looking and include Fitch’s views of future performance. The key
rating factors will be affected by changes in project, business and or macro-economic
assumptions. Fitch’s infrastructure and project finance ratings are subject to positive or
negative adjustment, based on actual or projected financial and operational performance.
Below is a non-exhaustive list of the primary sensitivities that can influence the ratings and/or
Outlook.
Completion Risk: ratings will be sensitive to changes in attributes, reflecting performance

difficulties, and to the credit worthiness of the operator, shifts in complexity, ease of contractor
replacement, contractual terms, or credit enhancement, among other completion risk factors.
Revenue Risk: ratings will be sensitive to changes in the revenue paying counterparty’s credit
quality, demand for output, diversity of customers, price elasticity of demand, pricing structure
or framework, among other revenue risk factors.
Operation Risk: ratings will be sensitive to changes in the credit worthiness of the operator,
availability, productivity, costs relating to operation, and maintenance and life cycle, among
other operating risk factors.
Infrastructure Development and Renewal: ratings will be sensitive to changes to economic life,
concession maturity, capacity and utilisation of the asset, the expected capex requirements and
timing thereof, and termination compensation, among other infrastructure development and
renewal factors.
Debt Structure: rating will be sensitive to changes in the debt characteristics and terms,
structural features, derivatives and contingent obligations, the security package and creditor
rights, and refinance risk, among other debt structure factors.
Financial Profile: ratings will be sensitive to changes in leverage, coverage, liquidity, interest
rates, and amortisation profile, among other financial profile factors.
Limitations
Ratings, including Rating Watches and Outlooks, assigned by Fitch are subject to the
limitations specified in Fitch’s Ratings Definitions, available at
https://www.fitchratings.com/site/definitions.

August 2017
Disclosure
Fitch expects to disclose the following items in reports and/or rating agency
commentary:
 key rating drivers and their assessment;

 financial metrics;
 peer analysis;
 main analytical assumptions; and
 rating sensitivities.
Moreover, any variations to criteria will be detailed in Fitch’s transaction reports (as mentioned
above).

August 2017
Appendix 1 – Completion Risk in Project Finance

Project Complexity and Scale: Project complexity and scale vary significantly and provide the
context in which the contractor’s implementation plan and contractual arrangements will be
assessed. High complexity or large-scale projects can still achieve investment-grade ratings if
these aspects are properly managed. However, projects using unproven technology are
unlikely to achieve investment grade, unless associated completion and operation risks are
assumed by investment-grade counterparties.
Contractors and Implementation Plan: A suitably qualified contractor and a well-developed

implementation plan with adequate budget and schedule can alleviate project complexity
whereas an insufficient package can amplify risk.
Ability to Replace Contractor: Projects using established technology in predictable conditions

and with sufficient time and cost budgets are more likely to be able to replace the construction
contractor if required, for example following contractor insolvency. In contrast, more specialised
or challenging projects may be limited to a small number of replacement contractors, which is
likely to prevent the debt rating from exceeding the contractor’s rating.
Core Contractual Terms: To support investment-grade ratings, construction contracts need to

contain key provisions, such as fully passing cost and schedule risk to the contractor. There
needs to be clear scope of works, performance milestones and a dispute resolution mechanism
and credit enhancement in the form of funded budget contingency, payment retention and,
usually, performance bonding.
Focus on Credit Enhancement: Contractor liability levels are less important than liquidity and
other credit enhancement (such as letters of credit or surety arrangements) in Fitch Ratings’
analysis because recovery of claims from an insolvent contractor may be protracted and limited.
However, low liability limits may suggest that the contractor has concerns about completion risk
and will therefore draw additional scrutiny in the analysis.
Rating Can Exceed Contractor’s: In projects using established technology, where the base
cost budget and schedule are appropriately sized, where there are multiple replacement
contractors available and where the level of credit enhancement available to the project
company is sufficient to cover replacement cost in the appropriate horizon, then it is possible
for the rating of the project’s debt to exceed that of the contractor. Depending on the
circumstances, it is possible for a project to be rated two categories above the contractor.
Ratings Rarely Above ‘A’: Fitch analyses a mix of project attributes and the importance of
these factors to project completion. Project ratings are constrained either by completion risk or
the operating risk profile. When not constrained by the operating profile, less complex, well-
structured projects can reach the ‘A’ category but assessments need to be stronger across the
board with clear visibility through completion. Most projects have a mix of stronger and
midrange attributes, but are not constrained to a lower assessment because of a weaker factor.
Unconditional Debt Guaranty Mitigates Risk: To the extent a credit-worthy counterparty

provides an unconditional guarantee of debt takeout if project completion is not achieved by a
pre-established date (concession or PPA longstop, for example) or to the required standard,
Fitch’s completion risk assessment will not be viewed as a constraint on the rating of the debt.

August 2017
Project Complexity and Scale

An early stage in the analysis of completion risk is to assess the project’s relative completion
complexity and scale. Project financing spans a wide range. The Risk Factors Feeding into
Stress Levels chart under the section titled Framework shows Fitch’s assessment of the key
characteristics along with typical examples from the energy, transportation and social
infrastructure sectors.
A project will typically have a mix of factors within these attributes and the overall assessment
will not necessarily be aligned with the weakest factor. For example, solar PV installations may
have costs exceeding USD1bn (a weaker attribute) but are low complexity (stronger), can be
built in less than three years (midrange) and with a highly predictable cost profile (stronger).
Overall the assessment would be midrange for project complexity and scale.
A project with some weaker attributes may not achieve a rating higher than the contractor/credit
enhancement combination. However, one with earthworks of unusual scale, untested
technology and high environmental/geo-tech uncertainty may be constrained to sub-investment
grade, if there are significant risks that are not within the capacity of a contractor or its surety to
absorb or in their interest to cover in practice.
Project Complexity & Scale

Assessment Characteristics Typical examples Rating implication
Stronger  Low complexity  School buildings No Rating constraint1
attributes  Low scale (less than USD250m) or highly modular  Road resurfacing
 Limited duration (less than 2 years)  Airport terminal expansion
 Established technology  Utility scale solar PV
 Known environmental/geo-tech conditions  Onshore Wind
 Highly predictable costs (numerous benchmarks)
 Major manufacturer involved in installation
 Advanced stage of completion
Midrange  Some complexity on some aspects of the works  Major hospital expansion No Rating constraint
attributes  Medium scale (USD 250-750m)  Road/bridge/tunnel with critical
 Duration 2-4 years features
 Established technology with scale up risk or untested minor  Gas-fired power
components  Solar thermal
 Predictable environmental/geo-tech conditions based on  Run-of-river hydropower
sample testing  Light rail transit link
 Limited benchmarks for cost predictability
Weaker attributes  High complexity  Major bridge or tunnel works May be constrained to
 Large scale (over USD750m)  High speed rail link higher of sub investment
 Long construction process (>4 years)  Oil & Gas grade or contractor/credit
 Significant earthworks in uncertain conditions  Offshore wind enhancement combination
 Major components not within primary contractors control  Coal-fired power
(procurement/integration)  Dam or reservoir hydropower
 Untested technology
 Uncertain environmental/geo-tech conditions
 Lack of cost benchmarks
Source: Fitch
1
In general, ratings in project financings are unlikely to exceed the ‘A’ category due to idiosyncratic
risks associated with these single purpose transactions.

August 2017
30
Contractor Expertise and Implementation Plan

The project’s complexity and scale need to be matched by the use of contractors, sub-
contractors and suppliers of key equipment with suitable experience and capacity or else the
rating is likely to be constrained. Similarly, the project’s schedule, cost budget and related
contingencies need to correspond to the potential for delay and cost overrun.
The greater the complexity of the works, the greater is the potential for increased costs and delays.
These factors may be mitigated by adequate schedule and funded cost contingency, the use of
contractors of higher credit quality, scale and experience and suitable levels of credit enhancement.
Technical Advisor Input is Important

Fitch will review the report provided by the third-party technical advisor in assessing the relative
complexity of a project’s construction and the adequacy of the contractors and the
implementation plan. Typically, Fitch seeks special comment on the following areas.
 Contractor group’s experience.

 Suitability of design and ability to achieve required project parameters.
 Level of pass-through of project company’s responsibilities to contractors.
 Achievability of schedule and critical path items that could impact the schedule.
 Suitability and adequacy of implementation and team integration plans.

 Range of costs and delay scenarios including those related to utilities, geo-technical
conditions, third party commitments (e.g. right of way realignment) and any other known
interfaces.
 Suitability of cost budget and contingency.
 Comparison with cost benchmarks on comparable projects.
 Realistic downside scenarios for delay, cost and performance.
 Ability and likely cost to replace the contractor at different stages of the works.
 List of replacement contractors with comparable capabilities.
 Adequacy of buffers between expected schedule and technical performance with the
delivery dates and required performance under the concession or offtake contracts.
Contractor Expertise and Implementation Plan

Assessment Characteristics Rating implication
Stronger  Contractor, sub-contractors and suppliers of key equipment with No rating constraint
attributes successful track record in same project type, scale and region
 Cost & time budget including above market contingency levels
and able to withstand severe downside scenarios
 No material permitting risk
 No material external interface, connection or supply risks
Midrange  Contractors and suppliers with track record in related project May be constrained
attributes type to higher of ‘BBB’
 Cost & time budget including market standard contingency category or to
levels and able to withstand moderate downside scenarios contractor/credit
 Some minor permit conditions may exist but their impact on enhancement
schedule, delay and costs have been adequately accounted for combination
 External interface, connection or supply risks exist but have
been adequately mitigated
Weaker  Smaller or less experienced contractors or suppliers Constrained to sub
attributes  Contractor history of delays or cost overruns investment grade
 Ambitious project schedule with clear potential for delay
 Material permitting risk
 Significant external interface, connection or supply risks
Source: Fitch

August 2017
31
Availability of Replacement Contractors

Usually in project financing, the risks of construction cost and delay and asset performance are
passed in the first instance to a specialist contractor or a group of contractors. A key part of
Fitch’s analysis is to consider how easy it would be to replace the contractor(s) in case they did
not perform adequately or became insolvent. This would determine in particular to what extent
the rating of the project’s debt would be capped at the rating of the contractor(s). A weaker
assessment is likely to constrain the rating at the level of the contractor unless there are
completion guarantees from the sponsors, whereas a stronger or midrange assessment could
allow the rating to exceed that of the contractor.
Contractor Replacement
Stronger attributes  Many replacement contractors available No rating constraint
Midrange  Long stop date in concession/offtake contract adequate to Maximum one
attributes replace contractor category above
 Some replacement contractors available contractor rating
 Some volatility in availability of resources in local labour
market
Weaker attributes  Highly specialized technology Constrained to
 No or very few replacement contractors available contractor rating
 Uncertain availability of resources in local labour market
Source: Fitch
Contract Terms
Fitch will compare the project’s complexity and scale, the contractor and the implementation
plan against the formal risk allocation specified in the construction contracts. The following
provisions are necessary to support an investment-grade rating during the completion phase.
These should be supported by the opinion of the technical adviser.
 Clear design and scope of work matching the requirements of the concession or offtake
contract. There should also be clear risk allocation. In the event that the grantor or offtaker
requests design or scope changes, then the impact on construction costs and schedule
should be fully compensated under the concession or offtake agreement.
 Fixed price and date. The absence of fixed price or date provisions may suggest that the
works or schedule are particularly risky and may leave the contractor inadequately
incentivised to perform. Sponsor completion guarantees can be a substitute for fixed price
contracts.
 Adequate dispute resolution and arbitration arrangements to ensure that works continue
even through contractual disputes.
 Reasonably achievable milestones and other performance thresholds.
 Credit enhancement from funded contingency and payment retention. This provides credit
enhancement to cover events that do not involve performance breaches by the contractor,
for example changes in the scope of works, and leave some room for settlement of
disputes within the resource of the project company.
 Some level of liquidated damages as a performance incentive and sufficient to cover lost
revenues and additional interest and other costs resulting from delays beyond the
budgeted completion date.
Projects using target price construction contracts may still achieve investment-grade ratings if
the cost and delay risks are adequately mitigated through other means. For example, the
project’s tariff structure may allow for the pass-through of a substantial portion of potential cost
overruns or delays to customers. Alternatively, there may be protection provided by the
government against extreme delays or cost overruns. Fitch would assess these mechanisms
on a case-by-case basis.

August 2017
32
Contract Terms
Stronger attributes  Single primary contractor No rating constraint
 Fixed price and date certain contract; liability cap materially above likely replacement cost
scenarios
 Clear design and scope of work matching concession requirements
 Clear risk allocation with force majeure provisions matching concession agreement
 Clear dispute resolution and arbitration arrangements
 Detailed milestones, performance thresholds and completion tests
 Liquidated damages keeping project whole in severe downside scenarios
Midrange attributes  Multiple primary contractors in a joint venture; joint & several liability Higher of: (1) guarantor rating
 Fixed price and date certain contract; liability cap sized to likely replacement cost scenarios or (2) up to two categories
 Liquidated damages keeping project whole in most downside scenarios above contractor rating
Weaker attributes  Multiple primary contractors; several liability Constrained to sub
 Target price/date or similar contract leaving project company materially exposed to cost and investment grade in the
delay risk absence of other mitigants in
 Design and scope do not fully meet concession requirements transaction structure (e.g.
 Ambiguous risk allocation or significant mismatch with concession agreement cost pass through to
 Weak dispute resolution process customers)
 Multiple contractors with complex or poorly mitigated interface risks
 No provision for onsite inspection and reporting with poorly defined completion tests
 Weak liquidated damage provisions leaving project company exposed to losses
Source: Fitch
Contractor Rating and Credit Enhancement

Fitch assesses the contractor’s rating and whether the project company has sufficient credit
enhancement to meet the forecast costs of replacing the contractor. Assuming that there are
sufficient replacement contractors available, this credit enhancement will determine by how
much the project’s debt rating during the completion phase can exceed that of the contractor(s).
The key inputs for this analysis are:
 The credit quality of the contractor(s): The primary indicator of a contractor’s credit quality
will be its Long-Term IDR. Contractors often work in groups and so, depending on the
nature of shared liability, Fitch will decide which entity it is appropriate to assess.
 The technical advisor’s (TA) assessment of likely replacement cost: Depending on the
rating of the contractor, the time horizon used by Fitch to analyse the likely cost of
replacing the contractor will differ. For weaker-rated contractors, there is a higher near-
term default risk and so Fitch will consider a near-term replacement scenario, usually with
higher replacement cost, whereas for a higher rated contractor, the replacement scenario
would be later, resulting in a lower cost. Where such TA assessment is not available, Fitch
will pursue any available third-party assessments, including preliminary studies
commissioned by governments or multi-laterals to corroborate key project features and
assumptions. Fitch will then benchmark replacement cost ranges against closely
comparable peer projects where available.
 Flexibility provided by multiple contractors in a JV: The presence of multiple qualified and
credit-worthy contractors in a JV provides the flexibility that if one contractor defaults,
liquidates or exits the JV, the other partners will have some visibility and will have taken
measures to protect themselves and the project. In particular, they will be in a position to
limit delays from the transition of responsibilities. They will also be highly incentivized to
keep performing and honour their contracts due to their joint and several obligations while
minimizing cost increases and liquidated damages that they will have to absorb. Such a
set-up could reduce the consequences of a contractor failure and Fitch will review TA
reports if this benefit is reflected in the assessment of the replacement costs.

August 2017
33
 The overall credit enhancement level: Credit enhancement would come from funded
contingency, payment retention (to date of replacement) and by letters of credit (LCs) and
surety bonds. To justify a project debt rating higher than that of the contractor (i.e.
assuming the benefit of contractor replacement) on a project of midrange complexity and
scale, there would need to be credit enhancement of at least 10% of the construction
work’s value. The credit enhancement hurdle for projects of weaker or stronger complexity
may be adjusted upwards or downwards. LCs offer on-demand liquidity but leave the task
of replacing the contractor to the project company. Surety providers would take on the role
of replacing the contractor but, apart from any on-demand features of the bond, offer less
liquid support as they benefit from the same contractual provisions as the original
contractor.
Where there is reliance on a surety bond, some liquidity is still necessary to cover near-term
losses to the project company caused by delay. Fitch will evaluate whether the on-demand
aspects of the bond plus other sources of liquidity (LC, retention, funded contingency) are
sufficient taken together to cover costs or lost revenues resulting from delays of six months.
Assuming this is the case, Fitch would not differentiate in its analysis of credit enhancement
between LC and surety support.
Credit enhancement in the form of committed standby subordinated liquidity facilities with
limited drawing conditions and from strongly rated counterparties would be included in Fitch’s
analysis of completion phase liquidity.
For projects in a more advanced stage of construction, usually defined as greater than 50% of
projected spend completed, and where major design, right-of-way, geo-technical, third party
obligation, foundation milestones have been achieved or related risks have been mitigated,
Fitch may determine that a contractor rating is not required to perform its completion risk
analysis. Instead, Fitch will rely on discussions with the project sponsor, the construction
contractor and informed technical experts, and any available public information to assess that
contractor default is not a real possibility.
For purposes of this analysis Fitch will treat the contractor rating as equivalent to a ‘B-’ and will
evaluate resources available to the project company to manage replacement and related costs
as described here. In situations where time to completion is short (six months or less) and
Fitch’s view is that the likelihood of the contractor stopping operations within this timeframe is
remote, Fitch may consider that the contractor credit risk is no longer relevant for the project
analysis.
Evolution of Replacement Cost

The chart below depicts an example of a large infrastructure project with moderate complexity.
The TA’s assessment of replacement cost would reflect a scenario of either contractor
insolvency (cost premium to new contractor, some delays and fees) or performance breach
(which would also include more severe delays, lost revenues and rectification costs). The
replacement cost falls as time progresses due to remaining works value and reduced
complexity. The cost values in the chart below and the percentage values in below five charts &
tables are illustrative only. Actual values would be project specific.

August 2017
34
Evolution of Replacement Cost - Example Project

Replacement as % of total cost (RHS)
Remaining works value (LHS)
(USDm) (% of total cost)
TA replacement cost estimate (LHS)
1,200 35
1,000 30
800 25
20
600
15
400 10
200 5
0 0
0 1 2 3 4
Construction period (years)
Source: Fitch
Counterparty Characteristics table on page 6 shows how Fitch would assess this profile. For
example, to achieve a ‘BBB’ category rating, a project using a ‘BB’ category contractor would
need sufficient credit enhancement to cover replacement cost where the contractor became
insolvent in two to three years (15% in the example above). If the same project used instead a
‘B’ category contractor, then to achieve ‘BBB’ category ratings it would need credit
enhancement to cover the higher cost of a near-term replacement (23% in the example) due to
the weaker credit quality of the contractor.
Contractor Rating and Credit Enhancement Analysis

(% of total
construction costs) Project debt rating
Contractor Rating A BBB BB
BBB 2 – 3 year horizon Contingency & retention Contingency &
(Minimum 10%a) only retention only
BB Immediate (or worst case) 2 – 3 year horizon Contingency &
(Minimum 10%a) retention only
B Could not achieve ‘A’ category 6 – 12 months 2 – 3 year horizon
without guarantee (Minimum 10%a) (Minimum 10%a)
a
Note: This is the minimum required for a project of midrange construction complexity and scale and may be adjusted
upwards or downwards for projects of weaker or stronger complexity and scale respectively.
Source: Fitch
Fitch recognizes that the TA’s assessment is a qualitative judgement and can vary among firms.
Fitch will compare the TAs analysis to other market and internal benchmarks for
reasonableness and may apply a replacement cost cushion above that provided by the TA.
The rating of the project debt would be usually limited to six notches above the contractor rating.
In situations where the amount of third-party credit enhancement is viewed as significantly
exceeding the selected replacement cost scenario, thereby providing an unusually high level of
flexibility to pay a premium to rectify and accelerate construction to avoid a default at the
longstop date, and where Project Complexity and Scale is deemed to be Stronger, Fitch may
consider a rating uplift beyond the six-notches implied by the two rating category limitation.
However, this would be limited to no more than two additional notches based on the extent of
excess liquidity.
When the amount of credit enhancement is viewed as inadequate to cover replacement cost in
a likely scenario, Fitch will consider a rating above the contractor rating on a case-by-case
basis provided the minimum short-term liquidity threshold is met and there are additional
resources available to provide significant enhancement above the contractor’s rating.
Worked Examples
The examples in the tables below show how steps 1 to 5 interact to result in the completion
phase rating. It is possible for any one of the attributes to limit the outcome.

August 2017
35
A weaker assessment for complexity and scale is likely to place more emphasis on the credit
quality of the contractor and suggest that there may be few suitable replacement contractors
available. A weaker assessment for contractors and implementation plan would be likely to
constrain the rating to sub-investment grade as it would suggest that the project had been
poorly conceived. A weaker assessment in contract terms would probably limit to sub-
investment grade as it would leave the project exposed to price and schedule risk and provide
inadequate incentives for the contractor. Alternatively, a weaker assessment for contractor
replacement would cap the rating during the completion phase to that of the contractor as few
alternatives would be available following contractor insolvency or poor performance.
Contractors of weaker credit quality may constrain the rating unless there are ample
replacements and sufficient credit enhancement to fund replacement costs.
Case 1 – Schools Project

Assessment Rating implication
Qualitative assessments
Complexity & scale Stronger: Small project; low No Rating constraint
technical complexity
Contractor expertise and Stronger: Contractor has ample No Rating constraint
implementation plan relevant experience; schedule and
budget comparable to peers
Contractor replacement Stronger: ample replacements; No Rating constraint
non-specialised works
Contract terms Midrange: fixed price & date; Up to two categories above
dispute resolution; clear scope contractor rating
Contractor Rating & credit

enhancement
Contractor Rating category ‘B’
Credit enhancement 20% Provides reasonable margin over
6 – 12 month replacement horizon
(see Contractor Rating and Credit
Enhancement Analysis table)
Contractor Rating/credit ‘BBB’
enhancement combination
Achievable project debt rating ‘BBB’ Rating constrained by
category for completion phase contractor rating/credit
Source: Fitch
Case 2 – Complex Coal-Fired Power Plant

Complexity & scale Weaker: large project; proven but Constrained to higher of sub
complex technology investment grade or contractor/
credit enhancement combination
Contractor expertise and Midrange: large experienced Constrained to higher of ‘BBB’
implementation plan contractor; some critical schedule category or to contractor / credit
milestones enhancement combination
Contractor replacement Weaker: quite specialised Constrained to contractor rating
Contract terms Midrange: fixed price & date; Up to two categories above
dispute resolution; clear scope contractor rating

enhancement
Contractor Rating category ‘BBB’
Credit enhancement 20% Provides reasonable margin over
24 – 36 month replacement
horizon (see Contractor Rating
and Credit Enhancement Analysis
table on page 35)
Contractor Rating/credit ‘A’
Achievable project debt rating ‘BBB’ Rating constrained to

category for completion phase contractor rating due to limited
number of replacements
Source: Fitch

August 2017
36
Midrange or stronger assessments would tend to support ‘BBB’ or ‘A’ category ratings
respectively, subject to any of the weaknesses outlined above.
Case 3 – Offshore Wind Farm

Complexity & scale Weaker: Large scale; offshore Constrained to higher of sub
location investment grade or contractor/
credit enhancement
combination
Contractor expertise and Midrange: challenging weather Constrained to higher of ‘BBB’
implementation plan conditions category or to contractor / credit
Contractor replacement Midrange: some aspects specialised; Maximum one category above
replacement constrained by timing contractor rating
Contract terms Weaker: multi contract; interface risk Constrained to sub investment
left with project company grade

enhancement
Contractor Rating category ‘BB’ to ‘BBB’
Credit enhancement 20% Provides reasonable margin
over 6 - 12 month replacement
horizon (see Contractor Rating
and Credit Enhancement
Analysis table on page 35)
Contractor Rating/credit ‘BBB’
Achievable project debt rating ‘BB’ Rating constrained by lack of

category for completion phase fixed price and date contract
leaving project company
exposed to cost overrun and
delay risk
Source: Fitch
Case 4 – Road Upgrade Project

Complexity & scale Stronger: Low complexity; No Rating constraint
established technology; highly
predictable costs; medium scale
and duration (midrange attribute)
Contractor expertise and Stronger: Successful track record; no No Rating constraint
implementation plan permitting or interface; cost and time
budget can withstand moderate
stresses (midrange attribute)
Contractor replacement Midrange: Some replacement Maximum one category above
contractors; longstop date includes contractor rating
sufficient buffer
Contract terms Midrange: fixed price & date; dispute Up to two categories above
resolution; clear scope; Single contractor rating
contractor (Stronger attribute)

enhancement
Contractor Rating category ‘BB'
Credit enhancement 30% Credit enhancement sufficient to
cover early stage contractor
default (see Contractor Rating
and Credit Enhancement
Analysis table on page 35)
Contractor Rating/credit ‘A’
Achievable project debt rating ‘BBB’ Constrained by contractor

category for completion phase replacement therefore
negating full benefit of credit
enhancement
Source: Fitch

August 2017
37
Appendix 2 – Rating Project Finance Holdcos

This framework applies where infrastructure/project assets are controlled by one holding
company (Holdco) in the following ways:-
 A single ring-fenced operating company (Opco), owning one or several assets (in such
case, in homogeneous sectors and with mutualized cash flows).
 Several ring-fenced Opcos - as long as they have similar structures and belong to the
homogeneous sectors (i.e. renewable assets, or transportation assets). This framework
would not apply where there is an expectation of material assets disposals and additions.
Where there is no sufficient separation between the Holdco and Opco, the level of influence
that Holdco may exercise on the Opco would preclude using this approach. In such situations,
Fitch’s Parent and Subsidiary Linkage Methodology could be used

August 2017
38
Analytical Framework
Single Project Structure
As is typical in project finance, the Opco is subject to strong contractual and statutory restrictions
on the business it can engage in or the actions it can take, creating a ring-fencing with the Holdco
or the various sponsors. This is generally established through non-consolidation opinions on the
legal side, but also strong additional debt and cash upstream restrictions most often based on
financial ratios covenants. As a result, Opco can be analysed on a standalone basis as the
Holdco has limited ability to increase Opco debt or deplete its cash balances.
Consequently, Fitch will analyse Holdco debt on the basis of the unrestricted cash flows such
2
as dividends or shareholder loan repayment that the Opco will be able to upstream. The
approach includes three steps:
 Use as the Holdco CFADS the dividends that Opco is allowed to distribute under the Opco
Rating Case.
 Separately take into account applicable distribution restrictions covenants. Even in

situations where the Opco is generating excess cash, covenants may create dividends lock
ups, which may prevent the Holdco from servicing its own debt. Figure 1 below details how
the likelihood of lock ups would result in a rating constraint.
 Although the approach is not to use consolidated debt as a basis for the Holdco rating, it is
important to look at the consolidated credit profile, where the Holdco debt is added to the
Opco senior debt in the relevant ratios, to ensure that the Holdco debt rating on a
standalone basis is no better than the consolidated credit profile would suggest. This
means that in principle the Holdco’s debt cannot be of better credit quality than the
equivalent junior debt at Opco level. Fitch expects that Holdco debt would be rated lower
than Opco debt unless in specific situations (eg Opco ratings constrained by rating cap).
Figure 1 – Calculation and Application of Lock Up Constraints

A strong ring-fencing that insulates the Opco’s credit risk from Holdco’s indebtedness
exposes the Holdco to the Opco’s structural protections such as dividend lock-up. In most
situations the Opco’s creditors will benefit from covenants restricting paying dividends to the
Holdco if the opco’s financial metrics reach a certain level. The breach of the lock-up
covenants would disrupt the Holdco’s cash flows and, in the absence of structural features
(deferral, liquidity) at the Holdco level, may result in the Holdco’s default.
Fitch therefore assesses the likelihood of the Opco breaching its lock-up covenant to
determine the impact on the Holdco’s credit quality independently of Holdco’s own leverage.
No matter how small debt service at Holdco is, lock-up is a binary event that prevents any
dividend from being paid.
Approach:
1. Calculate ‘Lock Up Distance Ratio’ = (Opco Rating Case minimum DSCR)/(Opco Lock-
Up Level)
2. Compare the ‘Lock Up Distance Ratio’ with the relevant Sector Criteria DSCR guidance
by rating level
3. Result will establish the potential for Holdco’s rating cap
Fitch assesses the distance to lock-up by comparing the ratio to criteria thresholds (e.g. 1.3x
for ‘BBB’ category for contracted solar projects). This defines a proxy for the required margin
to the default risk and differentiates between sectors. The cash-flow volatility of merchant
power projects is higher than for availability based projects and requires wider margins.
2
For simplification, any upstreamed cash flows will be labelled as dividends in the remainder of this
document.

August 2017
39
Without a strong liquidity position at the Holdco level, Holdco debt is more exposed to rapid
migration to default than Opco debt. Breaching the lock-up covenant at Opco level means that
Holdco will receive no cash flow to service its debt. Conversely, at Opco level, cash flow
available for debt service may be insufficient to fully service debt but some may still remain (e.g,
DSCR of 0.90x). With moderate liquidity, the Opco may be able to service its debt for few
periods before effectively defaulting.
Portfolios Structures
In cases where the Holdco fully owns a stable portfolio of Opcos, with similar structures and
assets, the approach could be applied as follows:
1. Holdco CFADS equal to aggregate of dividends that can be upstreamed by all the Opcos
under each Opco rating case.
2. Calculation of ‘Lock Up Distance Ratio’ (as detailed in Appendix 2) for each Opco.
3. The lowest Lock Up Distance Ratio would be used to assess the Holdco rating cap unless
the loss of that Opco’s dividend flows would not prevent the Holdco from servicing its debt.
In such a case, the second lowest would be used subject to same materiality test.
The consolidated profile would be established by aggregating all Opcos cash flows, and all
Opco and Holdco debt.
There may be situations where distribution restrictions could be triggered for other reasons
than financial ratio covenants being breached such as the failure to refinance non-amortising
debt at Opco level 12 months before maturity or the failure of an Opco to renew offtake
contracts. Such events can trigger cash accumulations (cash trap) or early amortisations (cash
sweep) at Opco level. Although these are protective for Opco creditors, Holdco CFADS may be
interrupted with no direct relationship with asset performance. In such cases, this approach
may not be applicable unless the occurrence of these events is deemed very unlikely.

August 2017
40
Examples of Application (Solar Projects)

Example 1
Single Opco, Lower Leverage

Opco debt 800,000
Holdco debt 200,000
Opco IR (%) 5
Holdco IR (%) 8
Tenor 10y
Holdco stand-alone profile very solid IG threshold 1.30

(2.23 DSCR)
Distance to lock-up consistent with IG Opco RC CFADS 170,000
(1.37 vs 1.30) Opco DS 103,604
Opco RC DSCR 1.64
Consolidated profile just short of IG
(1.27 vs 1.30)
Lock up 1.20
Indicates a high ‘BB’ rating for Holdco
 Dividends 66,396
Rating Driven by Consolidated Profile
Holdco RC CFADS 66,396
Holdco DS 29,806
Holdco RC DSCR 2.23
Conso RC DSCR 1.27
Opco dist to lockup 1.37

Source: Fitch

August 2017
41
Example 2
Single Opco, Higher Leverage

Opco debt 1,000,000
Holdco standalone profile consistent Holdco debt 200,000
with IG (1.36 DSCR) Opco IR 5%
Distance to lock up and consolidated Holdco IR 8%
profile low, consistent with ‘B’ Tenor 10y
(1.09/1.07)
Indicates a ‘B’ rating for Holdco IG threshold 1.30

Opco RC CFADS 170,000
Driven by Consolidated profile & Lock Opco DS 129,505
Up Distance Ratio Opco RC DSCR 1.31
Lock up 1.20
Dividends 40,495

Holdco DS 29,806
Holdco RC DSCR 1.36
Conso RC DSCR 1.07
Opco dist to lockup 1.09

Source: Fitch

August 2017
42
Example 3 – Several Opcos
Several Opcos
Holdco standalone profile strong (1.63x
Opco 1 debt 200,000
DSCR)
Opco 2 debt 220,000
Distance to lock up low for Opco 3, but Opco 3 debt 100,000
would not trigger holdco default in case
of lock up Holdco debt 300,000
Lockup at Opco 2 would trigger default, Opco IR 5%
hence Distance to Lock Up used for Holdco IR 8%
holdco is that of Opco 2 (1.75x) Tenor 10y
Consolidated profile not consistent with
Opco 1 RC CFADS 60,000
IG (1.25)
Opco 1 DS 25,901
Seems to indicate a ‘BB-category’ Opco 1 RC DSCR 2.32
rating for Holdco Lock up 1.20
 Distance to lockup 1.93
Driven by Consolidated Profile Opco 1 dividend 34,099

Opco 2 DS 28,491
Opco 2 RC DSCR 2.11
Lock up 1.20
Distance to lockup 1.75
Opco 2 dividend 31,509

Opco 3 DS 12,950
Opco 3 RC DSCR 1.54
Lock Up 1.35
Distance to lockup 1.14
Opco 3 dividend 7,050
Total dividend 72,658

Holdco DS 44,709
Holdco RC DSCR 1.63
Conso RC DSCR 1.25
Min Opco dist to lockup 1.14

Triggers default? No
Second lowest 1.75
Triggers default? Yes
Dist to lock up used 1.75
Holdco RC DSCR 1.63

Conso RC DSCR 1.25
Distance to lock up 1.75
Source: Fitch

August 2017
43
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Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004.
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The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant
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Rating Criteria for Infrastructure and Project Finance

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Evaluate Cash Flow Stability

Evaluate Financial Structure

Evaluate Stress Scenarios

Rating Criteria for Infrastructure and Project Finance 2

Risk Factors Feeding into Stress Asymmetric Risk Factors

Source: Fitch Source: Fitch

Typical Attributes and Peer Comparison

Structure and Information

Rating Criteria for Infrastructure and Project Finance 3

The involvement of local parties is considered to be advantageous, as they may be more

Ownership and Sponsors

Rating Criteria for Infrastructure and Project Finance 4

Rating Criteria for Infrastructure and Project Finance 5

Sponsor A Sponsor A Sponsor A

Hedging and Working

Subcontractor One Subcontractor Two Technical Legal

Rating Criteria for Infrastructure and Project Finance 6

Legal and Regulatory

Legal and Regulatory

Rating Criteria for Infrastructure and Project Finance 7

Use of Expert Reports

Rating Criteria for Infrastructure and Project Finance 8

Completion Phase While Operations Continue

Rating Criteria for Infrastructure and Project Finance 9

Penalties for underperformance will be evaluated for reasonableness based on an assessment

Rating Criteria for Infrastructure and Project Finance 10

Rating Criteria for Infrastructure and Project Finance 11

Attributes on supply risk will directly drive

Rating Criteria for Infrastructure and Project Finance 12

Decommissioning, Handover, License Renewal Risks

Rating Criteria for Infrastructure and Project Finance 13

Broader Demand Risk

Attributes on Revenue will directly drive

Rating Criteria for Infrastructure and Project Finance 14

Revenue Risk Characteristics

Infrastructure Development, Renewal/Obsolescence, Economic

Evaluating Infrastructure Development Execution Risks

Improvement projects at operating facilities require managers to handle myriad challenges.

Rating Criteria for Infrastructure and Project Finance 15

Obsolescence and Economic Life

Infrastructure Renewal and Obsolescence

Termination Compensation Risk

Termination at Grantor’s Option

Rating Criteria for Infrastructure and Project Finance 16

Termination Compensation Risk

Rating Criteria for Infrastructure and Project Finance 17

Comprehensive insurance, including business interruption insurance, is a typical tool used by

In some instances, events will be determined to be “uninsurable,” meaning insurance of the

Where a project or infrastructure asset is exposed to uninsurable risks, a second level of

Whether mitigation is required depends on a qualitative assessment of the project’s

Rating Criteria for Infrastructure and Project Finance 18

Debt Characteristics and Terms

Rating Criteria for Infrastructure and Project Finance 19

Asymmetric Risk Derivatives and Contingent Obligations

Rating Criteria for Infrastructure and Project Finance 20

Security Package and Creditor Rights

Rating Criteria for Infrastructure and Project Finance 21

Rating Case Design

Assumption Refinance Risk Characteristics