Government Guarantee Risk Measurement Sovereign Debt Management - - PowerPoint PPT Presentation
Government Guarantee Risk Measurement Sovereign Debt Management Forum World Bank Washington DC, 3-4 December 2014 Lalu Taruna Anugerah Head of Contingent Liabilities Unit Ministry of Finance of The Republic of Indonesia Directorate
Lalu Taruna Anugerah Head of Contingent Liabilities Unit
Ministry of Finance of The Republic of Indonesia Directorate General of Debt Management Phone : +6221 351 0714 Fax : +6221 351 0715 Website : www.djpu.depkeu.go.id Email : lalu.taruna.anugerah@gmail.com
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Creditors SPV
Line Ministry/ Municipality/SOE/ Local SOE
Sponsor Sponsor Govt Equity Sponsor Loan Agreement Recourse Agreement Guarantee Agreement Equity Cooperation Agreement / PPA
SOE / Local SOE Govt Creditors
Recourse Agreement Guarantee Letter Loan Agreement
Scope of Guarantee Agreement: a. Default risk b. Termination risk caused by political risk Scope of Guarantee Letter:
Project Project
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* PLN is an SOE in electricity sector, and PDAMs are Local SOEs in water sector
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Weight 20.0% a. 10.0% b. 10.0% 20.0% a. 10.0%
10.0% 10.0% a. 5.0% b. 5.0% 10.0%
3.3%
3.3%
3.3% 40.0% a. 15.0%
15.0%
5.0%
5.0% Base 11.10 3 2
Ba1 11.10
11.10 11.10 Ba1 11.10 Notch Adjusted Score 1.40 12 12 18 12 Modifiers 5.10 2.60 2.60 12 12 1.30 15 12 15 14
Non Investment Grade
4 3 12 14 Market Position Internal Credit Rating SPU for Company XYZ Base Rating Generation and Fuel Diversity Management Key Credit Metrics (CFO pre WC + Interest)/(Interest+Principal) 0.70 Ability to Recover Cost and Earn Return Ability to Recover Cost and Earn Return Timeliness of Recovery of Operating and Capital Diversification Factors Base Rating Liquidity Financial Policy
Final Rating
Final Score Sub Score Regulatory Framework Legislative and Judicial Underpinnings of the Consistency and Predictability of Regulation
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* Additional discount could be applied to the fee :
** XYZ is a State Owned Enterprise in electricity sector
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= PD x EAD X LGD
*) - The guarantee has been issued by government mostly only for one party (undiversified)
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Weight Score Final Score 30.0% 2.76 a. 12.0% 9 b. 8.0% 6 c. Asset Ownership Model 10.0% 12 14.0% 2.1 a. 7.0% 15 b. 7.0% 15 10.0% 0.45 a. 5.0% 3 b. 5.0% 6 6.0% 0.84 a. Strategic Positioning 2.0% 15 b. Operational Effectiveness 2.0% 12 c. Governance (BoD) 2.0% 15 40.0% 4.05 a. 15.0% 1 b. 15.0% 18 c. FFO / Net Debt 5.0% 6 d. RCF* / Capex 5.0% 18 Baa3 10.2 10.20 3 10.20 Financial Policy 3
11.20
Ba1 11.20
Regulatory Environment & Asset Ownership Model Stability & Predictability of Regulatory Environment Cost and Investment Recovery (Ability & Timeliness) Operational Characteristics & Asset Risk Key Credit Metrics Adjusted Interest Coverage OR FFO Interest Coverage Net Debt to Regulated Asset Base OR Debt/Capitalisation Base Rating Operational Efficiency Scale & Complexity of Capital Programme & Asset Condition Stability of Business Model & Financial Structure Ability & Willingness to Pursue Opportunistic Corporate Activity Ability & Willingness to Increase Leverage Management Notch Adjusted Score Internal Credit Rating SPU for Company ABC
Non Investment Grade Final Rating
Factors Rating Base Liquidity Base Score Modifiers *) Retained Cash Flow (RCF) (FFO – Dividend) / Capex
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Score Legislative and Judicial Underpinnings of the Regulatory Framework (regulated electricity)
1 Utility regulation occurs under a fully developed framework that is national in scope based on legislation that provides the utility a nearly absolute monopoly (see note 1) within its service territory, an unquestioned assurance that rates will be set in a manner that will permit the utility to make and recover all necessary investments, an extremely high degree of clarity as to the manner in which utilities will be regulated and prescriptive methods and procedures for setting rates. Existing utility law is comprehensive and supportive such that changes in legislation are not expected to be necessary; or any changes that have occurred have been strongly supportive of utilities credit quality in general and sufficiently forward- looking so as to address problems before they occurred. There is an independent judiciary that can arbitrate disagreements between the regulator and the utility should they occur, including access to national courts, very strong judicial precedent in the interpretation of utility laws, and a strong rule of law. We expect these conditions to continue. 3 Utility regulation occurs under a fully developed national, state or provincial framework based on legislation that provides the utility an extremely strong monopoly (see note 1) within its service territory, a strong assurance, subject to limited review, that rates will be set in a manner that will permit the utility to make and recover all necessary investments, a very high degree of clarity as to the manner in which utilities will be regulated and reasonably prescriptive methods and procedures for setting rates. If there have been changes in utility legislation, they have been timely and clearly credit supportive of the issuer in a manner that shows the utility has had a strong voice in the process. There is an independent judiciary that can arbitrate disagreements between the regulator and the utility, should they occur including access to national courts, strong judicial precedent in the interpretation of utility laws, and a strong rule of law. We expect these conditions to continue.- 6 Utility regulation occurs under a well developed national, state or provincial framework based on legislation that provides the utility a very strong monopoly (see note 1) within its service territory, an assurance, subject to reasonable prudency requirements, that rates will be set in a manner that will permit the utility to make and recover all necessary investments, a high degree of clarity as to the manner in which utilities will be regulated, and overall guidance for methods and procedures for setting rates. If there have been changes in utility legislation, they have been mostly timely and on the whole credit supportive for the issuer, and the utility has had a clear voice in the legislative process. There is an independent judiciary that can arbitrate disagreements between the regulator and the utility, should they occur, including access to national courts, clear judicial precedent in the interpretation of utility law, and a strong rule of law. We expect these conditions to continue. 9 Utility regulation occurs (i) under a national, state, provincial or municipal framework based on legislation that provides the utility a strong monopoly within its service territory that may have some exceptions such as greater self-generation (see note 1), a general assurance that, subject to prudency requirements that are mostly reasonable, rates will be set will be set in a manner that will permit the utility to make and recover all necessary investments, reasonable clarity as to the manner in which utilities will be regulated and overall guidance for methods and procedures for setting rates; or (ii) under a new framework where independent and transparent regulation exists in other sectors. If there have been changes in utility legislation, they have been credit supportive or at least balanced for the issuer but potentially less timely, and the utility had a voice in the legislative process. There is either (i) an independent judiciary that can arbitrate disagreements between the regulator and the utility, including access to courts at least at the state or provincial level, reasonably clear judicial precedent in the interpretation of utility laws, and a generally strong rule of law; or (ii) regulation has been applied (under a well developed framework) in a manner such that redress to an independent arbiter has not been required. We expect these conditions to continue. 12 Utility regulation occurs (i) under a national, state, provincial or municipal framework based on legislation or government decree that provides the utility a monopoly within its service territory that is generally strong but may have a greater level of exceptions (see note 1), and that, subject to prudency requirements which may be stringent, provides a general assurance (with somewhat less certainty) that rates will be set will be set in a manner that will permit the utility to make and recover necessary investments; or (ii) under a new framework where the jurisdiction has a history of less independent and transparent regulation in other sectors. Either: (i) the judiciary that can arbitrate disagreements between the regulator and the utility may not have clear authority or may not be fully independent of the regulator or other political pressure, but there is a reasonably strong rule of law; or (ii) where there is no independent arbiter, the regulation has mostly been applied in a manner such redress has not been required. We expect these conditions to continue. 15 Utility regulation occurs (i) under a national, state, provincial or municipal framework based on legislation or government decree that provides the utility monopoly within its service territory that is reasonably strong but may have important exceptions, and that, subject to prudency requirements which may be stringent or at times arbitrary, provides more limited or less certain assurance that rates will be set in a manner that will permit the utility to make and recover necessary investments; or (ii) under a new framework where we would expect less independent and transparent regulation, based either on the regulator's history in other sectors or other factors. The judiciary that can arbitrate disagreements between the regulator and the utility may not have clear authority or may not be fully independent of the regulator or other political pressure, but there is a reasonably strong rule of law. Alternately, where there is no independent arbiter, the regulation has been applied in a manner that often requires some redress adding more uncertainty to the regulatory framework. There may be a periodic risk of creditor-unfriendly government intervention in utility markets or rate-setting. 18 Utility regulation occurs (i) under a national, state, provincial or municipal framework based on legislation or government decree that provides the utility a monopoly within its service territory, but with little assurance that rates will be set in a manner that will permit the utility to make and recover necessary investments; or (ii) under a new framework where we would expect unpredictable or adverse regulation, based either on the jurisdiction's history of in other sectors or other factors. The judiciary that can arbitrate disagreements between the regulator and the utility may not have clear authority or is viewed as not being fully independent of the regulator or other political pressure. Alternately, there may be no redress to an effective independent arbiter. The ability of the utility to enforce its monopoly or prevent uncompensated usage of its system may be limited. There may be a risk of creditor-unfriendly nationalization or other significant intervention in utility markets or rate-setting.
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No Remarks No Remarks 1 Cash and Liquid Investments 1 Forecasted FFO (if negative) 2 Forecasted FFO (If Positive) 2 Expected Capital Spending 3 Forecasted WC Inflows (If Positive) 3 Forecasted WC Outflows (If Negative) 4 Proceeds of Assets Sales 4 All Debt Maturities 5 The Undrawn Portion of committed bank lines in 12 Months 5 Any required cash-based, postretirement employee benefit top-up needs 6 Expected ongoing cash injections from a government or corporate group members 6 Credit puts that cause debt acceleration or new collateral posting requirements in the event of a downgrade of up to 3 notches. 7 Contracted acquisitions and expected shareholder distributions under a stress scenario, including expected share repurchases. · A-B: Liquidity sources (A) minus uses (B). Sources (A) Uses (B) The key indicators of a company's liquidity cushion are: · A/B: Liquidity sources (A) divided by uses (B).
Score Remarks 1 Exceptional 2 Strong 3 Adequate 4 Less than Adequate Effect/Notch(es)
Modifier final score for Company XYZ 3 Adequate Modifier final score for Company ABC 3 Adequate
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EXCEPTIONAL STRONG ADEQUATE LESS THAN ADEQUATE A/B of 2x or more projected each year over the next two years. Positive A-B, even if forecasted EBITDA were to decline by 50%. Few covenants. If covenants are present, headroom under these is such that forecasted EBITDA could fall by 50% without the company breaching covenant test measures, and debt is at least 30% below any covenant limits. The likely ability to absorb, high- impact, low-probability events (such as market turbulence, sovereign risk, or the activation of material- adverse-change clauses) without refinancing. Well-established and solid relationships with banks. A generally high standing in credit
equity, debt, and credit default swap (CDS) trading data relative to peers and market averages. Generally prudent risk management. To meet this assessment, the company needs to show evidence that its management anticipated potential setbacks and took the necessary actions to ensure continued exceptional liquidity A/B for the upcoming 12 months
above 1.0x over the subsequent 12-month period. Positive A-B, even if forecasted EBITDA declines by 30%. Sufficient covenant headroom for forecasted EBITDA to decline by 30% without the company breaching coverage tests, and debt is at least 25% below covenant limits. The likely ability to absorb high- impact, low-probability events without refinancing. Well-established, solid relationships with banks. A generally high standing in credit
from equity, debt, and CDS trading data relative to peers and market averages. Generally prudent risk management. To meet this assessment, the company needs to show evidence that its management anticipated potential setbacks and took the necessary actions to ensure continued strong liquidity. A/B of 1.2x or more over the upcoming 12 months. In particular, any upcoming maturities should be manageable. Positive A-B, even if forecasted EBITDA declines by 15%. Sufficient covenant headroom for forecasted EBITDA to decline by 15% without the company breaching coveragetests, and debt is at least 15% below covenant limits (or, if not, the related facilities are not material). The likely ability to absorb high- impact, low-probability events, with limited need for refinancing. Liquidity is supplemented by the perceived flexibility to lower capital spending or sell assets, among
Sound relationships with banks. A generally satisfactory standing in credit markets. This can be assessed from equity, debt, and CDS trading data relative to peers and market averages. Generally prudent risk management. To meet this assessment, the company needs to show evidence that its management anticipated potential setbacks and took the necessary actions to ensure continued adequate liquidity A/B of less than 1.2x over the next 12 months. This level offers scant protection against unexpected adverse developments. A-B of about zero or below. Covenant headroom so tight that coverage tests could be breached if forecasted EBITDA were to decline by just 10%. (A covenant breach on any related facilities would likely have a significant impact because the debt containing the covenants in question could not easily be repaid.) The likelihood of the company not being able to absorb low-probability adversities, even factoring in capital-spending cuts, asset sales, and cuts in shareholder distributions. No particular core bank relationship and indications of a poor standing in credit markets, such as wide CDS trades for several consecutive weeks or share price declines.
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Score Remarks 1 Positive 2 Neutral 3 Negative Effect/Notch(es) 1
Modifier final score for Company XYZ 2 Neutral Modifier final score for Company ABC 3 Negative
Assessment What it means Guidance Positive Indicates that we expect management’s financial policy decisions to have a positive impact on credit ratios over the time horizon, beyond what can be reasonably built in our forecasts on the basis of normalized operating and cash flow assumptions. An example would be when a credible management team commits to dispose of assets or raise equity over the short to medium term in
assigned a positive assessment. If financial discipline is positive, and the financial policy framework is supportive Neutral Indicates that, in our opinion, future credit ratios won’t differ materially over the time horizon beyond what we have projected, based on our assessment of management’s financial policy, recent track record, and operating forecasts for the company. A neutral financial policy assessment effectively reflects a low probability of “event risk,” in our view. If financial discipline is positive, and the financial policy framework is non-supportive. Or when financial discipline is neutral, regardless of the financial policy framework assessment. Negative Indicates our view of a lower degree of predictability in credit ratios, beyond what can be reasonably built in our forecasts, as a result of management’s financial discipline (or lack of it). It points to high event risk that management’s financial policy decisions may depress credit metrics over the time horizon, compared with what we have already built in our forecasts based
If financial discipline is negative, regardless of the financial policy framework assessment
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*) 37 = 33 Power Plant + 4 Package Transmission (million)
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