Private markets are providing new forms of long-term financing for industrial and infrastructure projects—offering solutions for the energy transition and technological revolution, and making a transformational impact on millions of people.
Private markets are providing new sources of long-term financing for industrial and infrastructure projects through corporate and project-level debt raisings. Project finance is typically used to fund the construction and operation of capital-intensive assets—spanning solar and wind farms, stadiums, highways, datacenters, and beyond. Debt is serviced from cash flows generated from the completed projects and secured by collateral that can include project assets, strong covenant packages, and guarantees.
Private markets participants are increasingly investing in project finance due to its tendency to feature higher debt leverage than corporates with the same rating level, and the overall credit resilience and growth prospects of infrastructure. At the same time, project finance issuers are expanding their funding sources into private credit, private equity, and private placements markets. These markets are used as a mechanism to diversify funding sources, extend tenor, and manage the costs and dependencies of funding from traditional bank debt due to risk-based pricing, capital considerations, and regulations.
S&P Global Ratings’ portfolio of 325 ratings on project finance issuers (of which 260 are public) is mainly composed of transactions in the power and energy, social infrastructure, and transportation sectors—with a smaller number of deals involving oil and gas, industrial, digital, and natural resource or mining transactions. The majority, or 70%, of project finance credit ratings are investment grade, defined as 'BBB-' and higher.
In assessing project finance and infrastructure transactions, we expect the project's sponsors, arrangers, and other transaction parties to provide information about the project, contracts, and counterparties. Our analyses provide an independent assessment of key construction, operational, and financial risks; the underlying credit fundamentals of a project; and potential future capital planning or debt issuance.
We expect the customization of project finance transactions to become both more common and complex as demand for new infrastructure grows—with issuers utilizing multiple layers of financing across both public and private markets due to the expansive amount of capital available and significant competition at play in funding these essential assets. As private capital continues to flow into project finance, we may see an increase in projects that have lower creditworthiness or faster credit deterioration in more volatile markets.
The project finance sector continues to face headwinds from geopolitical turmoil, uncertain trade policies and supply chain pressures, energy transition risk, and increased climate and extreme weather event risk.
Nevertheless, we expect to continue to see new, more complex structures and expansion of projects to new geographies, particularly in emerging markets, as well as new asset classes, including digital infrastructure.
For project finance issuers, negative outlooks continue to significantly outweigh positive outlooks, by nearly 3.5x as of September 2024, though down from 4.3x a year earlier.
This indicates that we could expect downgrades to continue to outweigh upgrades in fourth-quarter 2024 and through 2025.
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