or minimize refinancing and obsolescence risk. A debt term exceeding the term of the off-take contract
introduces market risk in the transaction at contract expiry. Depending on project type, unless there is a
corresponding step-down in debt service, the transition from fixed contract to market-based prices will
increase risk, which, if material, could affect the rating. A project with a strong current and forecasted
competitive position can reduce this market risk. If the tenor of debt exceeds the term of an off-take
contract, interest rate risk may also arise.
is refinanced when a substantial period remains under the existing contract, the refinancing risk during
the remaining term of the contract is mainly the potential DSCR impact of a higher interest rate. If the
original minimum DSCR was high for the rating, the effect on the rating of refinancing risk may be
relatively low, because the coverage could remain robust even for a sharp increase in interest rates at
refinancing. If moderate increases in interest rates reduce DSCRs that were already close to the bottom of
the range for the project's risk rating, then the effect of refinancing risk on the rating would be moderate
to high. Hydro projects are better positioned than most to bear refinancing risk, given their long asset
life and low operating costs.
and interest payments is standard for an investment-grade project. A major maintenance reserve is also
typical, particularly if ProjectCo is exposed to significant major maintenance expenses or if asset perfor-
mance is less predictable over the life of the project. In reviewing reserves, Origin pays particular attention
to the constraints surrounding the use of the funds and the type and tenor of investments (typically very
low risk) permitted to be made with the funds. To prevent aggressive distributions to equity, the financing
structure also typically includes a cash trap provision which prevents equity distributions if ProjectCo's
DSCR falls below a certain threshold or reserves have been previously drawn and not yet fully funded.
banks and lending syndicate members. Origin expects that the credit quality of these key players will be
notably higher than the rating of the project to support the underlying project risk within a stable financ-
ing framework. In its analysis, Origin also considers the country of domicile of the financing parties since
the stability of the financial and legal systems can potentially introduce additional risk to ProjectCo, even
in instances where the financing party is currently highly rated.
to-the sum of required principal and interest payments, after capital expenditures). The level, stability
and certainty of cash flow coverage are assessed by Origin. In calculating the DSCR, all fixed charges are
considered, including subordinated debt (unless these obligations have explicit deferability clauses that
extend beyond the maturity of the senior debt and/or subordination of payments and cure of default).
components of the cost structure will typically be provided to ProjectCo through the payment mecha-
nism. The portion of ProjectCo's revenues subject to indexation will often closely match the operating
expenses and is typically subject to escalation. Origin verifies there is no material mismatch between costs
and revenue by stress testing the inflation assumption in the final model. Investment-grade projects can
typically withstand inflation of roughly 10% annually throughout the life of the project without having
the DSCR fall below 1.0.