In assessing project finance transactions, S&P Global Ratings expects the project's sponsors, arrangers, and other transaction parties to provide a certain level of information about the project, contracts, and counterparties that is of satisfactory quality. Here, we'll outline the information that transaction parties typically provide to us in relation to project finance transactions.

For an example of a typical documentation checklist for a standard project, see the Appendix. Each project is unique, so we would consider how this list would be amended based on the preliminary information the project sponsors, arrangers, and other transaction parties provide about the project. In certain instances, some information may be replaced with an appropriate alternative data source. For example, we may rate a windfarm project without receiving an independent wind forecast if we are provided with adequate data to form a view on the future wind resource for the project site.

Frequently Asked Questions

What information do you receive when assessing a project?

We would typically receive the same information that prospective debt providers would receive. This includes all material project contracts (including the concession/offtake agreements that determine the project's revenue, construction and operations contracts, debt documents, intercreditor agreements, and opinions). We would also typically receive a detailed financial forecasting model, including a scenario analysis, together with supporting information for all the assumptions used in that model. To aid in our assessment of the key project risks, we would look to review a technical report prepared by an independent expert, together with other due diligence reports prepared by external consultants (such as resource assessments, market studies, accounting, tax, and insurance reports). Before assigning the final rating, we would have received all final execution versions of the financing and transaction documents and legal, tax, and accounting opinions, as appropriate, as well as a model audit report, which is typically available.

Do you need different information for assigning credit assessments, credit estimates, preliminary ratings, and final ratings?

Yes, but the differences mainly relate to the level of detail and the status of the documents. We typically could assign a credit assessment once we have reviewed summaries of the key project documents, the term sheet for the proposed financing, and the initial financial forecasting model. At the credit assessment stage, in place of due diligence and independent expert reports, we may instead interview these parties.

A credit estimate is a point in time confidential indication of our likely rating on an unrated entity or instrument. Like a credit assessment, usually involves an abbreviated analysis, and we typically could assign a credit estimate based on summaries of key operating and credit documents, historical financial statements if available, and an initial financial forecasting model.

A preliminary rating (PR), on the other hand, would involve greater detail than a credit assessment and the documents would usually be in near final form (i.e., when the transaction parties would expect further changes to be only minor, and we determine that the information provided to us is of sufficient detail to assess all of the various elements of our criteria, and we do not expect any material changes to relevant terms or conditions).

We would only assign a final rating (FR) once we have received final execution versions of the financing or transaction documents, contracts, due diligence reports, and opinions. We would also review the final financial forecasting model that incorporates the final key inputs from the various project and financing contracts (such as revenue or final debt pricing) and review the results of our downside scenarios. Any difference between the information or documentation reviewed for the PR and final information and documentation could lead to the FR being different from the PR.

You may use third-party reports to support your analysis, so what would you consider an "independent expert"?

Independent experts should be experienced. We focus on the author's relationship with the project sponsors, as well as the experience and expertise of the author. Key attributes would include:

Independence.  The expert is typically engaged for the benefit of the debt providers, rather than the project sponsors, and in any case its compensation should not be directly linked to the successful financing of the project.

Experience  The expert should have appropriate previous experience in the sector covered by the project as well as the country where the project is located. For example, being a mining expert covering Scandinavia may not be sufficient to assess a mining project in Africa given different operational, weather, and market conditions.

Track record.  An expert's track record may also support its experience in a particular area.

Do you rely on reports from independent experts?

No. We use independent expert reports to help with our understanding of a project. As such, we focus on the assumptions, qualifications, scope limitation and exclusions, and underlying analysis as much as we look at the final conclusions. We will take into account our own view of the various assumptions that have been made--for example, foreign exchange or interest rates, GDP growth assumptions, commodity prices, growth in total miles driven or peak energy demand in a region.

Typically, we would expect reports to include:

Factual presentation of the project.  This summarizes what the expert has specifically reviewed and analyzed and ensures that all aspects of the project have been considered.

Risk assessment of the project.  This covers all the risks pertinent to the expert's area of focus that could result in cash flow disruptions. For example, if the expert is assessing the construction of a power plant, this would usually include the risk that the plant may not be built on budget or time and may not ultimately perform as designed. Risks would then typically be grouped according to their likelihood of occurrence (high to low probability) and impact (high to low impact) to ensure that the key risks (high probability and high impact) are thoroughly reviewed.

Other sections.  These include views and analysis of the project parties' ability and experience in similar projects, as well as views and analysis of assumptions of the sponsors in certain key areas. For example, for public-private partnership projects, the expert would typically review the payment mechanism and determine the level of financial abatements that could occur. For power projects, the expert would typically opine on assumed availability levels over the life of the project, including any potential deterioration as the plant ages.

Does the above apply only for technical experts?

No, we would expect all report authors to be independent and have an appropriate level of experience. We would typically look for the same issues to be covered by a traffic forecast report, for example.

Transaction parties may also obtain legal opinions on certain aspects of a project. Legal opinions are views expressed by a lawyer or law firm and are not conclusive outcomes. Legal opinions also typically rely on factual assumptions and are limited by qualifications, which we will review as part of our assessment of legal issues.

When you use an independent expert's report to support your analysis, do you expect to receive updates on a regular basis?

Most independent expert reports are prepared at the inception of a project and typically would not be reviewed or updated. In fact, as time progresses, the initial conclusions reached at the start of the project will likely be partly superseded, and our focus will shift based on actual project performance. To support our ongoing analysis, and in addition to actual performance, we will typically review reports from independent experts that remain involved with the project. For example, a technical expert that assessed the construction phase would typically be involved until the work is complete and would provide regular updates on progress to debt investors.

Similarly, it is common to see financial forecasting model audits being refreshed as models are amended from their original bid structure and become an operating model combining actual data with forecast data.

To the extent that updates of reports or models are available or underlying assumptions or contracts for the project have changed over time, we would expect to also receive updates from the transaction parties.

TRANSACTION STRUCTURE FEATURES

What information do you typically need to assess a project's transaction structure?

Our criteria address the key structural elements we assess for projects:

• The project's ownership and organization structure;
• Any business limitations imposed (either in the company's constitutional documents or debt agreements);
• Security arrangements and pledges;
• Extent of the negative and positive covenants (typically found in a common terms deed, indenture, or other lending agreements); and
• Cash management arrangements.

To support this assessment, we would typically also review legal opinions in relation to the legality, validity, and binding nature of the documents, as well as their enforceability against the relevant project parties. In certain circumstances, we would also receive legal opinions in relation to the potential for a project to be drawn into a project's parent or related party bankruptcy filing.

Are there cases when additional information may be beneficial to your assessment of the transaction structure?

We may seek additional information in certain circumstances. For example, we would typically expect to receive information about a project company that has an operating history to help us understand whether there are any preexisting liabilities.

Do you need information to assess structural features only at the time of the initial rating, or would you expect to receive further information over the life of the project?

Typically, we undertake an assessment of structural features at the time of the initial rating. If we become aware that any information we originally received has changed, we would review those changes to understand any potential effects on the transaction structure. For example, amendments to any contracts could affect our conclusions. Other circumstances could include a change of ownership (to a single owner from multiple owners) that could affect our assessment of non-consolidation of the project in a parent bankruptcy in certain jurisdictions.

OPERATIONS PHASE

What typically determines the information received for assessing the operations phase for the project?

As part of our operations phase assessment, we usually look at the project's ability to deliver the required output or service on time and at the required contracted level. We will also look at the external dynamics that may affect the level of revenue, such as market demand or market price for projects exposed to those risks, along with the availability of inputs to the project such as fuel or commodities that are necessary for the project to maintain production.

To assess the technical risks, we would review the operations and maintenance (O&M) and, where relevant, life-cycle and offtake/concession agreements. We will also review any resource and raw material and supply agreements. These documents help us ascertain whether the project is likely to meet its contractual obligations and provide information as we determine our key operations assumptions in our base and downside scenarios.

We typically receive a technical review by an independent expert to assist in our operations phase analysis. It will also usually provide some information on the depth of the O&M/service provider market that will feed into our counterparty assessment. Independent expert reports relating to market demands also provide greater details on market dynamics. These types of reports are particularly relevant, for example, for a greenfield toll road project. Similarly, an independent assessment of ore reserves would be relevant to a rating on a mining project.

What information do you need to assess the financial strength of a project during the operations phase?

We typically receive a financial forecasting model from the project sponsor or financial advisor covering the entire life of the project.

We will review the assumptions and logic within this model. Our review of those forecasts will focus on a comparison of those forecasts with the contractual structure. For example, we would expect that, for a given set of assumptions, the revenue calculated in the forecast matches the revenue that would be determined under the project contracts, including a review of whether features included in debt documents (such as dividend lock-ups, the cash flow waterfall, and cash reserving) are appropriately represented and whether changes to assumptions flow through the model as expected.

In many markets, it is customary for the financial forecasting model to be independently audited by a third party who will comment on the appropriateness of the calculation logic, accounting and tax treatments, and specific mechanisms included in project documents that affect cash flows. We would typically receive the findings of any audit report to ascertain the reliability of the financial forecasts.

We generally forecast project cash flows independently using our own internal cash flow model, initially with sponsor input assumptions, and then running cases with our own base case assumptions (which may be similar to those of the project sponsors), and our downside stress assumptions. This allows us to calculate financial metrics as defined in our criteria (for example, which expense to include in our calculation of debt service coverage ratio [DSCR]) and to validate calculations provided in the project sponsor model.

What information do you subsequently need?

Our surveillance during the operations phase of a project will focus on the actual performance of the project, both from an operational and financial perspective.

To assess operational performance and determine whether the operating environment has changed, we likely would receive periodic project updates that are prepared for other project participants (such as debt providers or public-sector counterparties). We would supplement this with direct conversations with representatives from the project company and, where necessary, any of its subcontractors or concession providers. We will also usually receive compliance certificates (including underlying assumptions for the calculation of financial ratios) and updated financial forecasts. In addition, we would usually receive annual audited financial statements (typically provided within 120-180 days after the balance date) and regular unaudited financial statements and often receive updated financial cash flow models that reflect actual historical performance and updated sponsor budget expectations going forward.

We will also typically receive any amendments to the project documents (including change orders to assess potential materiality), notices issued by any of the project parties that could lead to material claims or to a default if relating to noncompliance, and changes of ownership affecting project participants.

CONSTRUCTION PHASE

What information do you typically need to assess the construction phase stand-alone credit profile (SACP)?

Our assessment of the construction activities in a project focuses initially on the technical aspects, including construction difficulty and technological risk, along with an assessment of the experience of project parties such as the contractor, sponsor, and concession provider in constructing and operating projects of similar complexity, location, and regulatory environments to this project. We also look at whether individual risks have been assigned to the party best able to address that risk and then combine this with our assessment of project management and construction progress to arrive at a construction business risk assessment.

We assess funding adequacy at the time of financial close, looking at funding sources we consider certain as well as additional likely sources of funding. We will then compare these totals to our expectation of uses of funds,F including our estimate of potential likely cost overruns and the potential replacement cost for failing or less creditworthy contractors. The combination of the two assessments determines the preliminary construction phase SACP.

We will assess these aspects through our review of the key construction agreements, permits and licenses, and detailed construction programs highlighting potential bottlenecks, as well as details of the insurance package available during the construction period. We would also usually review this documentation against tender documents and consider whether any gaps exist.

To supplement this review, we would typically receive access to key construction personnel to ascertain the capability and experience of the team involved in the project. We would also assess the overall capability and creditworthiness of the contractors on the project.

Finally, we will review any detailed construction budgets and assess the likelihood and amount of any cash inflows that may come into the project from sources other than debt and equity.

Is the input of an independent expert necessary? What would be the consequences if there were none?

Our analysis of the construction phase of a project relies initially on our knowledge of the sector, and we would use data from similar projects, as well as publicly available information. In most cases though, this may not be sufficient.

Typically, we have access to a technical report by an independent expert, which provides insight into the risks the project will face during construction. It also highlights how a particular contractor may be suited to manage those risks. We may supplement our review of the report with an interview with the independent expert.

Do you form a view on a construction contractor solely through its counterparty dependency assessments (CDA)?

No. While the construction contractor CDA is a potential cap on the preliminary construction SACP, we look at other aspects of the contractor that influence the chance of successful construction completion when completing our assessment of the construction period business assessment, including contractor ability with this type of technology, the experience and expertise of the staff on this project, the geographical breadth of operations, and contractual terms.

Furthermore, the CDA can often be higher than the credit rating on the contractor. When determining the CDA, we begin with the contractor rating, or if not available, a credit estimate. We then examine construction contract terms and the ability to replace a contractor together with replacement funding that would be available if the contractor fell into distress. We view the risk that a contractor stops work on a construction project and cannot be replaced as being different than the risk that the contractor continues to make timely payments on its own debt.

If multiple contractors are working jointly on the construction efforts, we will assess a CDA for construction as a whole, which may be based on the strongest contractor if the obligation is joint and several, or a weaker contractor if that contractor is irreplaceable.

How do you then monitor progress during construction?

Our surveillance during the construction phase of a project seeks to answer two questions:

• How is the construction progressing relative to our expectations?
• Has anything changed that could affect the project?

To answer the first question, we would review periodic project updates (monthly, typically) and maintain a dialog with key project parties, establishing progress to date against the program and budget. Ongoing testing and commissioning results may also help assess the likelihood of practical completion being achieved on time and provide an indication about future performance of the assets being built. In most cases, an independent expert appointed by the project's debt investors would provide a view on progress as part of any sign-off for payments due to the construction contractor. The frequency of updates will depend on the complexity of the project and amount of time contingency built into the program, but we would expect to receive updates at least quarterly. We would also review any amendments to the project contracts that we received.

Given the relatively short length of a typical construction task and potential rapid changes in the project's construction progress, we believe that timely information is critical. For example, receiving annual progress updates for a construction project expected to last two years typically would not allow us to determine in a timely manner whether there is a risk of completion being significantly delayed.

COUNTERPARTY ASSESSMENT

What information do you use to determine CDAs?

Our assessment of a counterparty in a project will typically depend on our initial assessment of the materiality of that counterparty to the project as well as the contractual support and replaceability of that counterparty.

If we assess that the exposure to a specific party is not material or that the rating on the project will not be linked to the credit quality of that party, we typically would not receive any specific information about that counterparty--other than its ability to perform its task.

In all other cases, in the absence of a rating on that counterparty, we will need to assess the counterparty's creditworthiness to establish a CDA. In line with our information and data policy as applied to corporate entities, we would generally receive historical audited financial statements as well as sufficient information and data on the business of the company to assign that credit estimate. If the counterparty is an affiliate of a rated company and we consider it to be "core" or "highly strategic" to the overall group, then we would ask for the financial statements of the parent and not the subsidiary because the overall group's creditworthiness will be more relevant to the rating on the company.

Where a CDA has been assigned, we will generally need to review it based on updated information to determine whether to make any changes. For example, we typically would determine the CDA for a replaceable construction contractor only at the time of assigning the rating or if there were a material change to the construction scope or funding, whereas we would review a CDA linked to a revenue counterparty that is deemed irreplaceable regularly (at least annually).

OTHER

What happens if you don't receive certain information?

Our opinion of the information received may affect our assessment of a project and the issue credit ratings. We would withdraw or suspend a rating when information of a satisfactory quality is no longer available in accordance with our policies and procedures.

Related Criteria

• Criteria | Infrastructure | General: General Project Finance Rating Methodology, Dec. 14, 2022
• Criteria | Infrastructure | General: Sector-Specific Project Finance Rating Methodology, Dec. 14, 2022
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

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