3.4.4. Further elements for the rating of creditworthiness and debt capacity

Creditworthiness is a combination of credibility and capacity 58 . For a full assessment the evaluation is quite similar to the calculation of the cost of capital (chapter 5.2) as probability of default and volatility very much affect the credit rating.

However, as the following example emphases, the most important key factors in project finance are

• predictability of cash flow and
• cash flow capacity

The only question that needs to be answered for the creditworthiness is the question for the cash flow. To do this, it is absolutely necessary to evaluate the project in its completeness, e.g. political environment, market risk (volatility, price level, and demand), completion (customer added value, cost of production, cost to market, and product substitutes) and the operational capability (maturity of technology, operational experience).

Side note

Side Note 4; Rating factors applied by Moody’s for Power generation Projects⁵⁹

Moody’s applies four key rating factors to assess credit risk for special purpose entities (SPEs) whose primary business purpose is the generation of electrical power, which are financed on non-recourse, project finance basis.

Table 11: Moody's rating criteria and weighting for Power generating projects

Additional six notching factors adjust the rating of the key criteria, depending on the specific project conditions and realization phase⁶⁰. These factors are

• Liquidity,
• Strength of project financing structure,
• Refinancing risk,
• Construction Risk
• Termination Payments
• Financial key metrics

⁵⁸ Volckart p 833
⁵⁹ The excerpt has been taken from Moody’s investor’s service December 21, 2012, Rating Methodology for Power Generation Projects and is NOT completely cited
⁶⁰ Moody’s investor’s service December 21, 2012, Rating Methodology for Power Generation Projects