Rating Factors for Infrastructure Bond.

Infrastructure bonds

Analysts are of the opinion that Nigeria’s huge infrastructural deficit is better financed by bonds instead of loans.

Traditionally, infrastructure investments have been financed with public funds. Governments were the main actors in the field, given the inherent public good nature of infrastructure and the positive externalities often generated by such facilities. 

However, public deficits, increased public debt to GDP and oftentimes, the inability of the public sector to deliver efficient investment spending have, in most economies including Nigeria, led to a reduction in the level of public funds allocated to infrastructure.

Budgetary pressures in Government have been recently compounded by the need to repair banks balance sheets and rebuild capital and liquidity buffers.

The scope of infrastructure demands has evolved significantly in recent decades and now comprises a broad range that includes traditional infrastructure projects, such as power, oil and gas, water, hospitals, schools, and prisons, as well as low-carbon, climate-resilient infrastructure, such as renewable energy projects. 

Unlocking the capital market for the allocation of private resources to public infrastructure requires the intervention of Credit Rating Agencies. Fundamentally, credit raters would help enhance fiscal transparency, price risks and returns, and facilitate capital market participation.

For investors, the strong attraction to infrastructure bonds include predictability of future earnings, minimal effect of fluctuations in the stock market, and secured recoverability of principal and interest payments based on expected cash flow from the operation of the relevant infrastructure facility.

Rating Analysts consider various factors when dealing with infrastructure bonds. The principal and interest payments for infrastructure bonds are based on the expected cash flows from a project rather than the issuer’s credibility. Hence, such bonds require an independent, differentiated evaluation method that takes into account uncertainty in expected cash flows in the future.

Bonds are also suitable financial products for institutional investors with long-term liabilities, such as pension funds and insurers, who are increasing their allocation in infrastructure investments amid the current low-interest rate environment. Therefore, the sustainability and going concern of the instrument is assessed for the stated duration of the bond.

Another important factor in rating scenarios is geographic risk – a measure of how volatile the economic environment is, as well as unpredictable economic conditions. 

The redemption and the use of proceeds of the bond could undermine the rating of the bond. Bonds guaranteed by an Irrevocable Standing Payment Order (ISPO) from a credible sponsor often attract good credit worthiness. Issuers’ credibility is a rating consideration as well.

In Nigeria, the Infrastructure Credit Guarantee Company Ltd (InfraCredit) also exists to enhance facilities by providing guarantees that will support the credit quality of local currency debt instruments issued to finance eligible infrastructure-related assets.

In April 2022, the Central Bank of Nigeria (CBN) announced that InfraCorp would unlock N8 trillion pension funds’ assets and accelerate public-private infrastructure solutions in Nigeria.


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