LONDON (Standard & Poor's) May 24, 2013--The development of a genuine market for long-term investments, whether for infrastructure, small and midsize enterprises (SMEs), or any other sector, requires a well-structured, transparent, and stable long-term policy framework, believes Standard & Poor's Ratings Services.
Responding ahead of today's deadline for comment on the Organization for Economic Cooperation and Development's (OECD's) public consultation paper on "Draft High-Level Principles Of Long-Term Investment Financing By Institutional Investors," Standard & Poor's said stability and transparency are essential to meet the scale of investment required by tapping into the estimated US$85 trillion of liquidity held by institutional investors worldwide.
The OECD's draft principles, which focus on eight broad issues ranging from incentives to prudential regulation, aim to facilitate long-term investment and help offset the increasingly short supply of long-term capital in the market since the financial crisis of 2007-2009.
However, while recognizing the opportunity for institutional investors to provide long-term capital for sectors such as infrastructure and SMEs, we nonetheless expect that pricing transactions appropriately from a risk-adjusted perspective will be challenging.
"Even if public authorities were to adopt and implement the principles quickly and in full, we believe that it may take a number of years for the market to build critical mass," said Peter Tuving, managing director, Standard & Poor's Infrastructure Finance Ratings. "We note that when transaction structures are supported by independent, stable, and transparent regulatory frameworks enshrined in legislation, the risk of periodic policy change is reduced.
"Such policy changes have in our experience discouraged investor participation, and in certain cases have the unintended effect of being a principal driver of increased default risk on infrastructure debt."
In our response to the OECD, we highlight three main areas of the High-Level Principles that relate closely to our credit research:
- Risk management (both credit and environmental, social, and governance [ESG]);
- The analysis of credit enhancement and pooling structures for capital market transactions (including those for SMEs); and,
- The provision of data on infrastructure, corporate, and project finance transactions (covering default and recovery statistics as well as financial and operational performance).