The financial model captures the economics of the project and is the basis for testing the sensitivity of
the project's DSCR to various drivers such as: (1) construction delays; (2) construction or operating cost
overruns; (3) equipment underperformance (capacity and availability below specification); (4) higher fuel
costs (for market-based, variable component fuel supply contracts); (5) lower power prices (for market-
based variable component PPAs); (6) production volumes; and (7) inflation. Other financial and structural
features included in the financial model and carefully reviewed by Origin are: (1) use of fixed- or float-
ing-rate debt; (2) fully amortizing versus balloon/bullet repayment; (3) debt and/or maintenance reserve
funds; (4) distribution test; and (5) additional debt test. Investment grade-rated project finance debt must
be able to survive reasonable worst-case scenarios.
of projects. Overlapping ranges are therefore used to encompass the variance in underlying project char-
acteristics. The table above provides an example DSCR for a typical natural gas-fired generation facility,
and can be used to illustrate the wide range of rating outcomes for a particular type of project. For
example, a 1.5 times (x) minimum DSCR for a natural gas-fired facility (in each case assuming a highly
rated revenue contract counterparty) would be consistent with: (1) a combined cycle power plant under
an availability-based tolling or cost-of-service-type agreement having a rating in the low "A" range; (2)
a combined cycle power plant with a traditional PPA (not a tolling or cost-of-service-type agreement)
exposed to volume or production risk having a rating in the high BBB range; (3) a rating in the B range
for a merchant gas peaker. Factoring in the other types of production (hydroelectric, coal, wind, solar,
geothermal), as well as all of the other considerations described in this methodology, the range of possible
ratings for a given DSCR level can be quite wide.
credit quality, or higher DSCRs in later years may be required where tail-end risks are significant. The
debt-to-capital ratio is considered more relevant in a project under construction or newly completed.
For existing hydroelectric power projects, non- or partially-amortizing debt is supported by the very
long life of the assets. Where projects have some operating history and audited annual financial reports,
historical coverage is evaluated with a focus on trend and as a basis for future performance expectations.
Typical ratios reviewed are: (1) EBITDA-to-interest; (2) debt-to-cash flow; and (3) debt-to-(cash flow
minus capex).
in a true sale to a bankruptcy-remote special purpose vehicle (SPV), obtaining complete isolation from
the bankruptcy estate of a parent company is more difficult for SPVs created for project finance assets.
These operating asset SPVs typically engage in a wider, although still limited, range of activities, creating
the potential for broader credit risks or business liabilities compared to the typical passive securitization
trust. Project finance transactions, however, are typically only structured to achieve ratings in the BBB/A
range, unlike structured finance ratings, where AAA ratings are commonplace.