finance debt, involving a growing number of banks from around the
world, confirm that the risk-profile of the project finance asset
class is comparable to that of senior unsecured corporate debt.
Originally initiated by four global banks in 2001, the data consortium
has attracted further participants, and now includes 30 project finance
lenders. The original banks were concerned that conservative capital
adequacy assumptions by the Basel Committee on Banking Supervision would
cause liquidity constraints in the project finance sector. These
assumptions have since been revised in line with the original results of
the survey which showed similar risk-profiles for project finance loan's
and senior unsecured corporate debt. With the participation of 26
additional banks the volume and quality of data now accumulated-10,000
separate facilities representing over 75% of global project debt-will
provide participants with reliable benchmarks to populate their internal
risk assessment models for use in complying with the Basel II accord when
it is implemented in 2008.
Aggregating the experience of 20 of the bank participants for 2002
revealed a 10-year cumulative default rate of 12%, with the average
recovery rate on these defaults recorded as 75%. This means that the
average Loss Given Default (LGD)-the unrecovered portion of a defaulted
loan and a key determinant in calculating capital adequacy-came out at
25%. "When compared with the data in Risk Solutions' LosstatsSM Database,
there is not much difference between the average recovery rate on project
loans recorded by this survey, and the recovery rate on senior unsecured
corporate bank debt." said Kevin Kelhoffer, director, Standard & Poor's
Risk Solutions, and the manager for this project.
LossStats database, the largest known commercially available database of
recovery data, has recently been extensively updated to include ultimate
recovery data for almost 2,800 instruments from more than 600 obligors in
37 industries, dating back to 1988.
The survey also casts light on the geographical and sectoral distribution
of project finance defaults. The largest geographic concentrations of
default are in Europe (34%) and North America (29%), with sectoral
concentrations in power (34%), infrastructure and media/telecoms (both
18%) and oil, gas & petrochemicals (17%). Cross-correlation reveals that
50% of defaults fell within the power or media/telecoms sectors in North
America and Europe-regions that constituted more than two-thirds of total
defaults for the two sectors.
Additionally, loans in the survey had an average time to default of 3.4
years, against an average project lifespan of 13 years. The period in
distress averaged almost two years.
"While providing valuable market information, this exercise also
demonstrates the effectiveness of specialist techniques being applied to
large data consortia to gather LGD data for niche sectors," concluded Mr.
Kelhoffer. "The wide variety of asset classes on which LGD data is
urgently needed requires an equally broad set of methodologies."