GCC Infrastructure Credit Quality Karim Nassif Associate Director Corporate and Infrastructure Ratings 18 February 2014 Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor s. Copyright 2013 by Standard & Poor s Financial Services LLC. All rights reserved.
Agenda Recent Infrastructure Rating Actions Infrastructure Sector Outlook & Thematic trends Project & Corporate (Infrastructure) Criteria Update 2
Infrastructure Rating Actions
Rating Actions: More Positive GCC Infrastructure Sector - Rating Actions* Company or transaction To From Date Action Abu Dhabi National Energy Co. PJSC A/Positive/-- A/Stable/-- 01-May-13 Ajman Sewerage (Private) Co. Ltd. BB+/Stable/-- BB/Positive/-- 17-Jul-13 Saudi Electric Co. AA-/Positive/-- AA-/Stable/-- 03-Jun-13 *Rating actions since Mar 31, 2013 until Feb. 15, 2013. GCC Gulf Cooperation Council. NR Not rated. 4
Infrastructure Sector Outlook & Thematic Trends
Project Finance: Ruwais Power Co. (Shuweihat 2) Landmark project bond in power sector rated A- /Stable First rated project power bond in the GCC First project finance transaction in the emerging markets rated under our Government Related Entity Criteria. Islamic finance holds significant potential Impact of Basle 3 6
Standard & Poor's EMEA-Based Project Finance Ratings By Sector As of Oct. 30, 2013 Sector No. of Issues Average initial Rating Total defaults Average initial rating of defaults Average no. of years to default % of issues % of default s Industrial 14 BB 1 BB 4.31 2.72 2.78 Leisure and gaming 29 BBB 0 N/A N/A 5.64 0 Natural resources/mining 10 BB 3 BB 3.81 1.95 8.33 Oil and gas 59 BBB 1 B+ 2.6 11.48 2.78 Power 250 BB+ 23 BB 5.03 48.64 63.89 Public finance/real estate 57 BBB 0 N/A N/A 11.09 0 Telecommunications 3 BBB 0 N/A N/A 0.58 0 Transport 92 BBB 8 BB+ 4.43 17.9 22.22
Standard & Poor's Project Finance Ratings By Category And Region As of Oct. 30, 2013 Rating North America EMEA Asia-Pacific Latin America AAA 0 0 0 0 AA 0 0 0 0 A 9 11 4 0 BBB 56 32 8 18 BB 29 10 0 7 B 17 7 0 3 CCC/C 3 0 2 0 Total 114 60 14 28 Above BBB (%) 8 18 29 0 BBB (%) 49 53 57 64 Speculative grade ('BB+' and below; %) 43 28 14 36 8
Transport and Corporate Securitisation: Potential for Growth but What About the Financing? Transactions supported indirectly by robust performance of commodity linked off-takers Funding for Saudi and Qatar Metro Projects Setbacks are not uncommon in the implementation of projects Mechanism for demand risk sharing between public and private sector 9
Utilities: Strong Performance Supported by Demand Growth Profitability and operations over the past year in line or ahead of expectations Dubai Electricity and Water Authority (BBB/Stable/--) Saudi Electric Co. (AA-/Positive/--) Abu Dhabi National Energy Co. (TAQA) (A/Positive/--) Strong demographic growth leading to increasing demand for utilities However full cost reflective tariffs still to be implemented in a number of GCC markets. Energy and utilities comprises almost ¼ of the total value of the projects market. Demand for power is forecast to triple in the next 25 years Water industry will be worth US$ 70 billion 10
Thematic Articles Published How does the US Shale phenomenon impact GCC producers? Project Bonds potential in the GCC Global Infrastructure funding needs, what is the gap left to be funded by the private sector? 11
US Shale Gas Impact on GCC Game-changer for global energy markets Limited effect on rated GCC-based oil producers in the near term, although the medium to long term is less certain The MEED reports U.S. is set to cut its petrochemicals imports by 50% over the coming years GCC is taking on the challenge Diversifying their business models Generating internal use of the oil Buying into the shale story MEED: Middle East Economic Digest
Natural Gas Prices on Various Indices 20 16 $ mmbtu 12 8 4 0 13 NBP-UK Henry Hub- US LNG_JPN NGC_German BEB_German Standard & Poor's 2014. Source: Bloomberg
Project Bonds In GCC Infrastructure Financing The lull in project bond activity due to cheap source of funding from well capitalized and liquid local banks Bond financing is set to take off caused by the infrastructure spending expected to be $2 trillion over the next 20 years Bond financing may become increasingly attractive when deal size is large and tenor is long Given Basle 3, and caps on lending in the UAE The Shuweihat 2 transaction could become a model for other transactions in the region seeking refinancing. The region is diversifying away from upstream O&G revenues through large industrial and energy-related projects
Sukuk Index vs. Corporate US Dollar Bond Index 7 6 Percentage % 5 4 3 2 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Sukuk Yield Bond Yield Source: HSBC NASDAQ Dubai GCC - Corporate US Dollar Bond Index (GCCI) & Sukuk Index (GSKC) 15
Project & Corporate (Infrastructure) Criteria Update
Corporate Criteria: Infrastructure Sector is Unique Infrastructure includes: Corporate Transportation and Utility entities Transportation entities are defined by long term concessions that provide predictable cash flows and operating margins Such as toll roads, ports, airports Utilities are defined by regulatory models that provide predictable cash flows and operating margins, with partial or full pass through of key cost components Integrated entities, or distribution and transmission entities 17
Entity Ratios are assessed using 1 of 3 tables 18
Project Finance Criteria Construction and Counterparty Risk Methodology is now final Transaction Structure, Operations, and Framework criteria went through Request for Comment (as of Feb.7 2014) Key Credit Factors for different sectors have been through Request For Comment. 19
Ratings Impact Anticipated From RFCs Viewed As Realignment 65% 27% Anticipated changes primarily driven by proposed Operations Methodology S&P s refined criteria will be applied consistently across all markets to ensure global comparability 20
Proposed Project Finance Ratings Framework
Thank You Karim Nassif Associate Director T: +971 (0)4 372 7152 karim.nassif@standardandpoors.com Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor s. Copyright 2013 by Standard & Poor s Financial Services LLC. All rights reserved.
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