Prognosis: stable. That’s rating agency Moody’s 2011 outlook for Europe and Middle East (EMEA) public-private partnerships (PPP), despite the sovereign debt crisis rocking parts of Europe and making world leaders cringe at the prospect of another global recession.
“[PPP] projects generally continue to be well insulated from the financial crisis,” said Declan O’ Brien, a Moody’s analyst. “During the period January 1, 2009 to August 31, 2011, we took 27 rating actions from a total portfolio of 46 publicly monitored transactions; positive actions have outweighed negative actions by 22 to 5,” he added.
In the report’s conclusion, Moody’s says that the resilience of EMEA PPPs is “driven by the strong underlying credit quality of the asset class and resilient contractual structures […] against a background of ongoing sovereign stress in the EMEA region”. The rating agency also tells investors to expect a strong pipeline of PPP projects in the UK, France, Spain and the Netherlands.
Despite persistent political opposition to the Private Finance Initiative (PFI) – the UK’s standardised procurement process for PPPs – Moody’s points out that the UK was still EMEA’s “most active market by transaction volume in the first half of 2011”. According to Moody’s, the UK coalition government has signed £1.8 billion (€2.1 billion; $2.8 billion) of PFI contracts and has an additional £5 billion of PFI deals in the pipeline.
Resilience aside, Moody’s notes the current landscape does pose some threats to EMEA PPPs. For a start, deteriorating credit profiles at the sovereign or sub-sovereign level can and do impact on PPP/PFI project ratings. The rating agency highlights two transport projects in Ireland and Spain that have seen their credit outlook deteriorate because of this, despite strong fundamentals for one of them.
Austerity policies and a focus on value for money can also affect the use of PPPs, while failing public finances, high public debt, and country volatility have raised sovereign borrowing costs in the region, which “results in higher funding costs for PFI/PPP projects,” Moody’s states.
Finally, banks, the traditional providers of long-term debt for EMEA PPPs, are facing a changing regulatory climate which is likely to reduce the number of banks willing to provide long-term financing. This means “the market may start to evolve with transactions financed on shorter tenors and possibly higher margins, reflecting the increased costs of lending once Basel III is phased in from 2013-19,” Moody’s believes.