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S&P develops assessment for pension funds involved in direct lending

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Standard & Poor’s is to begin rating pension schemes involved in the funding of construction projects on back on increasing interest in direct lending.

The ratings agency said developing the assessment method was partially driven by a change in the way pension investors are providing project finance, with the past two years seeing a gradual shift away from the full sum being provided in advance.

Instead, said Robin Burnett, the company’s senior director of infrastructure finance ratings, schemes are increasingly opting for a quarterly or monthly drawdown of financing.

“For transaction sponsors, as well as for those procuring the project, these more flexible structures remove the negative carry and improve the economics of the project,” he said.

However, because this creates an exposure to the fund’s risk of failure, other participating investors are needing assurances of its creditworthiness.

Burnett noted that S&P previously designed an assessment framework for the larger public sector asset owners, while some of the Canadian schemes were also rated entities.

The latest project evaluates the risks posed by defined benefit (DB) schemes with a single corporate sponsor.

He told IPE: “Regular UK, Australian or Dutch pension schemes, they are not an entity that even has the ability to issue debt, never mind being interested in a rating, so we’ve never had a methodology to assess them.”

He said the assessment examined the strength of the corporate sponsor, as many schemes are in “structural deficit”, and that the funds usually end up with a rating on par, or one below, their sponsors.

“The ultimate risk is on the underlying corporate sponsor, as opposed to the fund itself,” he said, explaining that the approach is similar to a covenant assessment conducted by some DB funds.

The approach “steps around the issue of the structure, the regulation, the liquidity”, Burnett said.

The process will ultimately increase the transparency of any construction projects – either infrastructure or real estate – that attract funding from such single-sponsor DB funds.

Burnett said S&P would not stop at simply evaluating single-sponsor DB funds.

“Whilst at the moment this criteria only deals with single-sponsor defined benefit schemes, in the future, we hope to expand that thinking and extend it to other types of schemes.”

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