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Sequoia's key takeaways on Moody's project finance study update

Moody's confirms infrastructure debt's continued low defaults, high recoveries and very low loss rates

Summer 2014

17 August 2014

In March 2014, Moody’s published an update to its study of project finance and infrastructure loan performance. The study now covers a 30-year period and an estimated 54.2% of the asset class globally and is one of the best sources of performance data for the asset class.

Together with its Addendum dated October 2013, the study confirms broad infrastructure’s continued low default rate of 49 bps pa, high recoveries at 84.3% and very low loss rates of 7.7 bps pa.
  

Sequoia’s Key takeaways are:
  • Moody’s infrastructure addendum published October 13, 2013 remains the most relevant to our investors since it focused on infrastructure and isolated the European loans.

  • Sequoia’s expected loss analysis using the October data indicated that European availability-based loans outperformed A-rated corporates from day one while PFI/PPP with demand risk outperformed A-rated corporates by year six.

  • Moody’s reported last week that the 10-year cumulative default rate for project finance globally decreased from 9.3% to 8.1%.  Most of that was improved accuracy of the study rather than improved performance.

  • Moody’s also reported that the infrastructure 10-year cumulative default increased from 5.2% to 6.6% but that was using a Basle II definition that includes banks reserving against perceived weakening credits.(1) Using Moody’s definition, which we believe is more appropriate, the 10-year cumulative default rate dropped by 30 basis points.

  • Broad infrastructure was reported in Moody's October 2013 Addendum to have 47 bps per annum (pa) default rates, 84.3% recovery rates and very low loss rates of 7.4 bps pa.(2) 
Since the Moody’s ratings familiar to most investors are based on expected loss (probability of default and expected recovery), Sequoia completed its own expected loss comparison. Since the average recovery rate for Western European infrastructure loans was 91%, Sequoia used a 90% recovery rate for infrastructure and 70% for corporate debt. Moody's recovery rate for global broad infrastructure is 84.3%.  

On an expected loss basis, European availability-based loans outperformed A-rated corporates from the very beginning while PFI/PPP with demand risk outperformed A-rated corporates by year six.


(1) Infrastructure in the March 2014 study includes global transportation and social. 
(2) Broad infrastructure in the October 2013 Addendum includes global transportation, social, and power transmission and distribution. 
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