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What Inflation And Higher Yields Mean For Infrastructure, Project Finance, And Utilities: Key Takeaways From Our Reports

(Editor's Note: On Dec. 12, 2022, we updated this report to add an article on Australian toll roads that we published on Dec. 8, 2022.)

PARIS (S&P Global Ratings) Dec. 1, 2022--S&P Global Ratings has published a series of articles analyzing the impact of high inflation and rising yields on infrastructure and utility companies and on project finance globally.

Key Takeaways From Our Relevant Published Reports

North America Power And Utilities: Inflation Could Create Some Pressure For Utilities, Nov. 28, 2022

Contacts: Gabe Grosberg and Aneesh Prabhu

  • Prolonged inflation could modestly weaken the North American utility industry's financial performance.
  • Unregulated power producers will benefit from the near-term doubling of power prices offsetting a rise in capital expenditure due to inflation.
  • Inflation is pushing up renewable project spending by 20%-30%, affecting some projects and developers.

North American Transport Infra: Essentiality Outweighs Affordability As Counterparty Risks Loom, Nov. 29, 2022

Contacts: Dhaval R Shah, Trevor D'Olier-Lees and Kurt Forsgren

  • Transportation infrastructure assets in North America have generally been resilient to the COVID-19 pandemic, given their essential nature and high operating margins.
  • Project financings with construction risks could suffer from delays, stemming from labor shortages (which also fuel inflation) and cost input increases, which may undermine the profitability of the underlying construction contract and thus the creditworthiness of subcontractors and contractors.
  • Persistent high inflation accelerates a shift in risk sharing, with counterparties less willing to take on fixed-price risks, resulting in potentially higher risks for projects unless more risks are retained by the public sector, particularly during the construction period.

EMEA Utilities: Regulation And High Prices Offset Affordability And Dividend Risks, Nov. 14, 2022

Contacts: Emmanuel Dubois-Pelerin and Massimo Schiavo

  • Inflation will improve remuneration of regulated businesses in the long term, while the main performance determinant for unregulated activities remains high power prices; but inflation-linked debt may strain credit metrics due to the timing of inflation pass-through.
  • In the short term, inflation reduces rating headroom for unregulated utilities amid cost increases until benefits from higher power prices kick in; regulated utilities can pass such costs through to end users in most supportive regulations.
  • As long-term yields outpace inflation, they should lighten utility companies' pension and asset-retirement burdens, although the credit impact depends on financial policy.

EMEA Infrastructure: Well Positioned To Pass On Higher Costs Through Tariffs, Nov. 23, 2022

Contact: Gonzalo Cantabrana-Fernandez

  • A key element of how infrastructure companies operate is their ability to pass through inflation via tariffs, but the strong social role of their operations and the affordability of tariffs will test regulatory frameworks.
  • Although infrastructure companies in Europe, the Middle East, and Africa are predominantly financed through long-term fixed or hedged debt, they will be exposed to rising interest rates as they tap the markets to meet refinancing needs in the future.

Latin America: Inflation Pass-Through Poses Greater Challenges For Toll Roads And Mass Transit Than For Utilities, Airports, And Ports, Nov. 22, 2022

Contact: Julyana Yokota

  • Latin American toll-road operators are sensitive to protests against steep tariff increases.
  • Apart from Argentina, regulatory frameworks for utilities are generally supportive across the region, but some utilities in Chile and Mexico won't receive higher tariffs to cover costlier expenses.
  • Toll-road operators across the region have a high share of floating debt, which could raise risks, given the time lag of cost pass-throughs amid likely persistence of high interest rates in 2023.

Chinese Toll Roads: Tariff Increases Far From Keeping Pace With Costs, Nov. 29, 2022

Contacts: Laura Li and Christopher Yip

  • In China, the inflation rate will be subdued--below 2.5% over 2022-2023; funding costs for toll-road operators will be modest and reined in by policymakers.
  • Inflationary pressures for toll-road operators primarily stem from the sharply increased construction and land acquisition costs, which are not sufficiently offset in tariff increases as the government aims to minimize costs for drivers and businesses.
  • Limited tariff hikes and continued COVID restrictions, together with heavy network expansion, will continue to strain cash flows and raise debt levels of rated toll-road operators.

Australian Toll Roads--Well Placed To Manage High Inflation, Dec. 8, 2022

Contact: Richard Timbs

  • We expect Australian toll prices will increase over the next two years at unprecedented high rates, due to their contractual linkage to inflation, supporting toll road operators' profitability.
  • Tolls will increase per concession agreement terms even though the impact of a sustained period of high toll price increases is untested and the consequences of a high cost of living--if prolonged--might spill over to toll road usage.

Related Research

This report does not constitute a rating action.

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