OREANDA-NEWS. Fitch Ratings has updated its rating criteria for infrastructure and project finance. The updated criteria are expected to have no impact on existing ratings.

Fitch has refined the integration of the risk factor assessments into its analysis. Most risk factors analysed in this master criteria will help inform the types and levels of stresses that Fitch will include, notably through the assumptions factored in 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).

Other risk factors would be asymmetrical, where only below-standard features would be reflected in stress or rating levels, while more credit-positive features, which we expect to be the rule, would have a neutral impact on the rating (e.g. an unclear termination regime would weigh on ratings, possibly preventing Fitch from assigning a rating).

Fitch has further detailed the definition of its rating case. The combination of the base case (ie expected case throughout a normal business cycle) and selected performance and financial stresses will result in a rating case.

The rating case includes some reasonable downside and does not reflect extreme stresses, which would be addressed through separate sensitivities. However, the rating case includes the fluctuations arising in a normal economic cycle, and therefore applies a through-the-cycle approach. Downturns are an expected event and the purpose of the rating case is to signal the nature of an event through which the rating will be stable.

Where relevant, the rating case may also include expectations of long-term 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 likely require a material change in the rating case and result in a rating change.

Fitch has detailed the definition and analysis of termination compensation risk (previously referred to as early termination). Fitch expects that the risk of early termination at the counterparty's option, ie in cases other than a project default, is covered by an appropriate compensation payment, which will be sufficient to cover the full repayment of rated debt instruments and avoid a default. If such optional termination risks are material and not adequately or compensated in a timely manner, Fitch may not be able to rate the transaction.

Fitch has revised its definition of political risk and clarified which risks should be included in rating cases. Political risk is the risk of unilateral changes by the state 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 are not included in rating cases. This risk is therefore not reflected in the rating.

Fitch has clarified its analysis of completion risk through incorporating its special report Completion Risk Analysis, published 1 October 2013, as an appendix of the criteria, and reducing the considerations for completion risk in the body of the report to a summary of the approach. Fitch has also clarified that completion risk applies only to project-finance type completion techniques. In contrast completion phases while operations continue are discussed under the Infrastructure Renewal rating factor.

Fitch will apply the revised approach to analyse both new and existing ratings for infrastructure and project finance, in combination with relevant sector-specific criteria when available.

The previous version of the criteria, published 12 July 2012, has been retired.