consent of bondholders. Insurance coverage must be from an institution with a reasonable credit rating
compared with the project debt rating (generally not significantly lower than the project debt rating) and
may be evaluated by an independent insurance consultant for bondholders. The SPV should be required
to provide annual insurance certificates proving continuing adequacy of coverage and compliance with
project terms. Insurance renewal risk is present in most projects, although in the normal course, insurance
premiums are a small percentage of overall operating costs. Most projects have the ability to absorb a
significant multiple of base case insurance premiums and while shortages in global insurance capacity do
occur, they are generally short-lived.
consultants, insurance consultants, environmental consultants and market consultants in order to aid in
assessing the level of many of the types of risk mentioned above. Issues that require expert evaluation may
include: (1) environmental assessments of potential liability (such as pre-existing conditions and the risk
of lender liability when enforcing security rights); (2) construction process, schedule, and costs; (3) oper-
ating and maintenance costs; (4) operating requirements of the off-take agreements; and (5) various other
matters including financial projections, asset quality and the condition of existing projects, adequacy of
the insurance package, and, for renewable generation, a resource study forecasting expected production
levels. It is preferable that experts be engaged on behalf of investors to minimize any potential conflicts
of interest.
performance and credit quality. The main country risk factors include (1) expropriation or "creeping"
expropriation (arbitrary, unanticipated adverse revenue-sharing by the host state including tax increases,
import and export tariffs, licensing fees, local content and directed procurement rulings, and project-
specific levies); (2) risk to currency transfer and convertability; (3) regulation regarding the currency
and economic environment that affects the exchange rate; (4) the regulatory environment with respect
to licenses, permits, tariffs and rate-setting; (5) the legal framework and jurisdiction, including contract
enforcement and dispute resolution; and (6) degree of social stability (e.g., absence of war or civil unrest).
A project's credit rating can also be constrained by the credit rating of its host country. Where political
insurance or structural features are used to mitigate the key country or political risk issues, careful review
and assessment is part of the rating process to determine whether coverage is sufficient. For projects
requiring political risk insurance, the strength, track record and experience of the insurance provider(s)
would also be reviewed.