The rated global infrastructure sector has grown substantially over the years, while maintaining lower risk than the overall nonfinancial corporate sector. By most measures, infrastructure credits rated by S&P Global Ratings have shown lower default rates, lower ratings volatility, and higher recovery prospects than nonfinancial corporates. Some of this is attributable to the infrastructure sector's stronger ratings profile, but most of these trends hold true at comparable rating levels as well.

Rating movement was positive in infrastructure in 2018, with 102 upgrades and 78 downgrades, continuing the rating direction from 2017. In addition, there were five defaults in the year, one less than in 2017.

This study covers 1,094 infrastructure ratings in utilities, oil and gas (mostly midstream operators), transportation, power, social infrastructure, and other industries. Included among these ratings are those analyzed in prior project finance default and rating transition reports--a universe of 246 as of Jan. 1, 2019. For the purpose of this study, our definition of infrastructure does not include U.S. public finance or international public finance rated infrastructure assets.

Ratings By Industry

This study covers the period from 1981-2018. This time frame ensures a sufficient number of records in terms of years and entities rated. From 1981-1992, the number of infrastructure ratings remained stable at about 300. Since then, the number of rated entities has steadily grown to above 1,000.

Utilities

Utilities make up the largest group of ratings within infrastructure, with 501, and all are rated under corporate finance. These ratings are applied using our corporate rating methodology and are generally above average. These entities are corporations that offer essential or near-essential infrastructure products, commodities, or services with little or no practical substitute (mainly electricity, water, and gas)--a business model that is shielded from competition (naturally, by law, by shadow regulation, or by government policies and oversight) and subject to comprehensive regulation by a regulatory body or implicit oversight of its rates (sometimes referred to as tariffs), service quality, and terms of service.

Oil and gas

The oil and gas sector has the second-highest number of ratings, at 178. Of these, 162 are in corporate infrastructure and 16 are in project finance. These numbers are further split between midstream oil and gas pipelines and the refining subsector, the latter being more exposed to earnings volatility.

Transportation

Transportation includes road, rail, bridge, port, airport, and tunnel projects. The sector has 129 ratings, 66 of which are in corporate groups and 63 in project finance. Some transportation credits are frequently exposed to competitive pressures from other modes of transit. For instance, a toll road could be affected by neighboring roads or other modes of transportation that could draw drivers and their tolls from the toll road. Even in the absence of competition, transportation credits often correlate directly with the local economy because of increases in utilization and economic growth.

Power

Power, which includes electricity generation and transmission power projects, has 123 ratings, 76 of which are in project finance and 47 in corporate sectors. These ratings are primarily for fossil-fuel power plants, although renewable-energy plants are also included. Power plants range from small, aging coal plants to newer, highly efficient natural gas projects.

Included within power are eight ratings for project developers. We define a project developer as a corporate entity, typically structured as a holding company, that owns, develops, and operates assets mainly in the energy and infrastructure sectors. Typically, a developer conducts its business chiefly through operating subsidiaries.

The operating subsidiaries are generally financed with nonrecourse debt, either on a corporate finance or project finance basis. Developers have little or no operations of their own and rely on distributions--such as dividend and fee income received from a diversified portfolio--to service their debt and other expenses. Operating assets are mainly in the energy, infrastructure, utility, and transportation industries. Common examples include power plants, toll roads, electric utilities, drill ships, and ports.

Social infrastructure

Social infrastructure has 75 ratings, and all but one of these entities are rated as project finance transactions. Financings in this area cover:

• Primary and secondary schools and tertiary teaching facilities;
• Health care projects, from large and relatively complex regional hospitals to smaller local primary care and psychiatric facilities;
• Social housing, military barracks, and student accommodations; and
• Detention centers (prisons) and judicial facilities.

Other ratings

Finally, this study includes 88 other ratings. This number of uncategorized ratings has fluctuated over time, with the highest count being 173 in 2008. These ratings are primarily project finance ratings that don't fit into one of the categories above or ratings on international public finance entities that finance infrastructure but are rated with different criteria. Such entities can include social housing developers, among others.

Growth In Ratings

The current total of 1,094 ratings is lower than the peak of 1,273 in 2016. From 1981-2018, the lowest number of ratings was 292, in 1990. Utilities have always been the largest industry within infrastructure. In 1981, there were 288 utility ratings, representing the highest proportion of ratings of any industry within infrastructure at any time since, and that number has increased to 501.

Oil and gas infrastructure ratings started at a tally of 27 in 1981. The number of oil and gas ratings was still 27 in 1992, but it has increased by a factor of more than six to 178 as of end-2018. Meanwhile, transportation ratings have increased in all but four years since the first ratings were assigned in 1993. Power ratings have had a similar growth pattern, with one rating in 1981 and growth in most years since. The first social infrastructure rating was not assigned until 2000, and the number of ratings in this sector peaked in 2016.

Energy-related industries, combined, have made up the bulk of infrastructure ratings. At the start of 2019, 73% of ratings were in the utilities, oil and gas, and power sectors, below their average of 86%. From 1981-2011, these three sectors were the three largest within infrastructure, with transportation recently claiming the third-highest number of ratings. Combined, these industries have accounted for as much as 99% of infrastructure ratings.

Since 2000, the fastest-growing group of ratings on a percentage basis has been social infrastructure, whose tally increased to 75 from one, followed by transportation, which increased by a factor of five, and power, which is almost five times larger than in 2000. Growth trends suggest that the largest sectors will continue to lead in the number of ratings for the foreseeable future.

Utilities, the largest sector, has lost 110 ratings since 2011, but it still has at least 323 more ratings than any other industry. Energy-related sectors together have grown 49% since 2000, which is remarkable given the already large number of ratings with which they began the study period.

Ratings By Category

Before the global financial crisis, the proportion of investment-grade ratings ('BBB' category or higher) was higher for both infrastructure and nonfinancial corporates. At the start of 2006, 49% of nonfinancial corporates were rated investment grade, but by the start of 2019, this share fell to 39%. Among infrastructure credits, a decline in the proportion of investment-grade ratings also occurred over this time frame, but to a lesser extent (to 75% from 82%).

By region, North America represented 50% of total infrastructure credits by 2019, down from 93% in 1991. In contrast, the Europe, Middle East, and Africa (EMEA) region represented 32% of total credits by 2019, up from 3% in 1991. S&P Global Ratings rated only two issues in Latin America in 1994, but that number grew to 122 (11% of the total) by 2019, reflecting growth of capital markets and of infrastructure as an asset class outside the U.S.

About 77% of infrastructure corporate ratings and 68% of project finance ratings were investment grade at the start of 2019, compared with only 35% of nonfinancial corporate ratings.

Within infrastructure, corporate ratings tend to be higher than project finance ratings, largely due to the impact of the utilities sector's relative size and ratings profile. About 5% of corporate infrastructure ratings are high investment grade ('AA' category or higher), while 'A' is the highest rating category for project finance infrastructure. At the lower end of the rating scale, 23% of corporate infrastructure ratings are speculative grade ('BB' category or lower), while 32% of project finance infrastructure ratings are at this level, in part because of the impact of midstream oil and gas.

The 'BBB' category is the largest for both groups but is larger for project finance. In comparison, the number of 'A' category ratings is closer to the number of 'BBB' category ratings for corporate infrastructure than it is for project finance infrastructure.

The 'BBB' category has been the largest every year since 1990. About 42% of infrastructure ratings are in the 'BBB' category, and the proportion of 'BBB' category ratings has been above 40% since 2001. However, since the financial crisis, the percentage of speculative-grade ratings has steadily grown. The proportion of total speculative-grade ratings was 18% in 2006 and grew to 22% just after the financial crisis, at the start of 2010. The percentage reached 26% at the beginning of 2017 and declined slightly, to 25%, by the start of this year.

Utilities have the highest total number of ratings, the most ratings in the 'A' and 'BBB' categories, and the only 'AAA' rating among the designated industries in this study. Oil and gas has the most 'BB' category, 'B' category, and 'CCC'/'C' category ratings. Power and oil and gas ratings are mostly speculative grade, at 56% and 53%, respectively, in large part due to the active investor market for speculative-grade ratings in those sectors. All sectors have at least 10% of their ratings in the speculative-grade category, with utilities having the smallest proportion, at 12%.

Infrastructure ratings are, on average, higher than nonfinancial corporate ratings. The largest category for nonfinancial corporate ratings is 'B', which has been the case every year since 2007 except 2010. Three-quarters of infrastructure ratings are investment grade, while just 39% of nonfinancial corporate ratings have that status. In part, this reflects the higher levels of disintermediation in the nonfinancial corporate sector, whereas the infrastructure sector still relies heavily on bank financing.

The number of ratings in the 'AA', 'A', and 'BBB' categories has been consistent for both infrastructure and nonfinancial corporate ratings, but the primary growth in nonfinancial corporate ratings has come from the 'B' category, while infrastructure's growth has been mostly in the 'BBB' category and, to a lesser extent, the 'A' category.

Ratings By Industry And Category

The industries within infrastructure have different ratings profiles, rating movement, and default patterns. Among the sectors with at least 100 ratings, power and oil and gas have the lowest ratings. About 56% of power ratings are speculative grade, as are 53% of oil and gas ratings. The percentage of speculative-grade ratings in oil and gas dropped to 11% in 2000 from 43% in 1989 and has since climbed to its current peak of 48%. Power ratings had historically been almost entirely investment grade in 2002, but the percentage of speculative-grade ratings spiked to 44% 2003 from 11% in 2002. The percentage reached a peak of 64% in 2016 before declining in the past two years to its current level of 56%.

Transportation ratings remained at least 90% investment grade through 2009, but two years later fell below 80%. The speculative-grade share in transportation has since consistently been about 20%. Social infrastructure has 80% investment-grade ratings and has had at least 80% investment grade in every year on record.

For infrastructure corporates, the large proportion of regulated utilities contributes much to the sector's overall high credit quality. Regulated utilities benefit from being essential services with high barriers to entry (often operating as natural monopolies).

Despite having higher leverage than infrastructure corporate peers, infrastructure project finance has a majority of investment-grade ratings because of the protections inherent to project finance, such as security packages, structural elements (including offtake agreements, hedging, reserve accounts, distribution traps, and legal separateness), and limitations on new debt and asset sales.

Table 1

Ratings By Region And Country

This study includes ratings in 59 countries. The U.S. accounts for 446 of the ratings, with the U.K. far behind with the second-highest total, at 189. The only other country approaching 100 ratings is Canada, with 98.

Regionally, North America is largest, with 544 ratings between the U.S. and Canada. EMEA is the second-largest region, with 353 ratings. Latin America follows with 122 and Asia-Pacific with 75.

For more than a decade starting in 1981, virtually all infrastructure ratings were from North America. Since the mid-1990s, ratings in North America and other regions have increased significantly, more than tripling. Most new ratings have come from outside North America, which retains the majority of all ratings. In 1981, only one of 318 ratings was from outside North America, compared with 550 in 2019. The number of ratings in all regions took off in 1997, by which time Europe had established itself as the second-largest region for infrastructure ratings.

Ratings category dispersion throughout most regions resembles that of infrastructure as a whole. The U.S., with 41% of all ratings, has a significant influence on ratings throughout the world. Infrastructure ratings in the U.S. do skew toward speculative grade as compared with non-U.S. infrastructure ratings.

Over the past several decades, U.S. infrastructure ratings have drifted to lower categories. In 1981, 72% of U.S. infrastructure ratings were in the 'A' category or higher. By 1991, less than half of ratings were at least 'A-', and the 'BBB' category was the largest, as it remains. The 'AAA' rating became extremely rare starting in 2003, alternating between one and zero, the current count. Speculative-grade ratings jumped to 118 in 2003 from 52 in 2002 and have averaged 116 for the past 10 years.

The U.S. rating distribution is lower than the distribution for infrastructure overall in all investment-grade categories and higher in all speculative-grade categories. By these measures, U.S. ratings are lower than those of any other region, but this is probably due more to obligor acceptance and investor tolerance of lower ratings in the U.S., rather than lower credit profiles of infrastructure entities in the U.S. Canada and Latin America have above-average concentrations of investment-grade ratings and lower proportions of speculative-grade ratings.

Table 2

Canada has the highest median rating among the nations with large numbers of ratings. This high credit quality is borne out at several rating categories: About 3% of Canadian infrastructure ratings are 'AAA', compared with 1% in infrastructure overall. Canada's proportion of 'AA' category ratings is 1 percentage point higher than infrastructure's, and its proportion of 'A' category ratings is 13 percentage points higher.

Asia-Pacific and EMEA have higher distributions of ratings, with the former having more 'AA' category ratings than other regions and EMEA having more 'A' category ratings than most regions. This largely reflects a higher proportion of government ownership in infrastructure within these regions, which generally leads to higher ratings because of the potential for extraordinary government support.

Rating Movement

As in most sectors, infrastructure rating movements have historically trended negative. Downgrades outnumbered upgrades 2,883 to 2,322 through 2018, and downgrades have surpassed upgrades in 25 years since 1981, compared with 13 years with more upgrades. The number of downgrades peaked in 2002 and 2003 with a total of 410 for the two years combined, or 14% of all downgrades since 1981.

More recently, however, trends have been favorable. Upgrades have exceeded downgrades in four of the past six years. From 2013-2018, there were 686 upgrades. Two of the highest years for upgrades were 2007 and 2008, with a combined total of 274, 30% of all upgrades since 1981.

The higher incidence of downgrades accelerated in the early 2000s. The growth in downgrades came mainly from the utility sector, which was experiencing credit stress during a time of deregulation. From 2000-2004, there were 702 downgrades in infrastructure, compared with 225 upgrades. Some of the more notable defaults occurred during this time.

The table below details the spike in infrastructure downgrades from 2000-2004. Utility downgrades exceeded the downgrades of all other groups combined in each year during this period, reaching a peak of 155 in 2002. The following year, utilities' ratio of downgrades to upgrades reached 17 to 1. Power and oil and gas had similar trajectories, combining for six downgrades in 2000 and 36 downgrades in 2002.

Table 3

The period from 2005-2008 was positive, with 150 more upgrades than downgrades, but from 2009-2012, there were 220 more downgrades than upgrades. In the transportation sector, several Australian ratings were lowered in association with demand risk. The power sector was also affected as merchant energy producers, especially older baseload coal plants, faced falling electricity prices brought on by the increase in gas-fired plants taking advantage of the shale gas boom in the U.S. Renewable energy also played a role as countries around the world increased the proportion of green energy sources to meet emission-reduction targets.

Because the majority of infrastructure ratings are--and have always been--investment grade, this category tends to lead among both upgrades and downgrades, historically. In fact, on an annual basis, at least 74% of all ratings have been investment grade in every year since 1981.

However, since 2009, speculative-grade ratings have taken more prominence among downgrades. In 2009, nearly a third of downgrades were for speculative-grade entities, which represented one-fifth of infrastructure ratings. From 2010-2018, an average of 31% of infrastructure ratings were speculative grade, while 38% of downgrades were for speculative-grade entities. From 1981-2008, the proportion of downgrades was closer to the overall proportion of speculative-grade ratings, with 16% of all downgrades occurring among speculative-grade entities, which made up 13% of all infrastructure ratings.

Three of the five defined industries within infrastructure had more upgrades than downgrades in 2018. Transportation had the highest upgrade-to-downgrade ratio in 2018, with 2.2 upgrades for every downgrade. Utilities and oil and gas were also positive, with 1.96 and 1.86 upgrades for every downgrade, respectively. Power nearly matched, with 11 upgrades and 14 downgrades, and social infrastructure had relatively few rating actions, with two upgrades and four downgrades.

The periods of highest downward rating movement were those with difficulties in the utilities, power, and oil and gas sectors. Most notable was the period of energy deregulation around 2001-2003 in the U.S. The sheer number of utility ratings means the subsector has a disproportionate influence on many infrastructure statistics. For example, while the utilities sector has a markedly low overall volatility rate, it often accounts for a majority of rating actions. In terms of upgrades versus downgrades, the utilities sector is more stable than the power sector, given its more regulated nature, especially since the performance problems of the 2001-2003 period.

The chart below depicts the net rating movement of each sector on an annual basis. Subtracting downgrades from upgrades shows how rating movement affected each sector's rating profile. Transportation had more downgrades than upgrades each year from 2005-2013, the longest negative streak among infrastructure industries, resulting in negative net rating movement of 45 downgrades over upgrades. Utilities had a shorter streak, from 1998-2003, but a much larger excess of downgrades over upgrades, at 391 during that time. Social infrastructure is more likely to have more upgrades than downgrades in any year, with 13 years of more upgrades or equal numbers of downgrades and upgrades and six years with more downgrades than upgrades.

All sectors except social infrastructure have downgrade-to-upgrade ratios of at least 1.05 to 1. Since 1980, the highest surplus of negative ratings actions has been among power ratings, with 1.79 downgrades for every upgrade. The category of other infrastructure follows with 1.66 downgrades for every upgrade, and transportation is next, with 1.39 downgrades for every upgrade.

Table 4

Over the long term, project finance ratings have defaulted more often than corporate infrastructure ratings, and corporate infrastructure ratings are more likely to be raised--somewhat consistent with expectations, given corporate infrastructure's greater share of investment-grade ratings.

The downgrade percentage in project finance has averaged 15.6%, slightly higher than 11.5% for corporate infrastructure. The annual average default rate is higher for project finance, at 0.75%, than for the corporate segment, at 0.34%. The corporate nonfinancial default rate averages 1.8%. Corporate infrastructure ratings are raised at an average annual rate of 9.4%, compared with 7.1% for project finance infrastructure.

Table 5

Rating Transitions

Transition tables provide detail on the speed with which infrastructure ratings change. Table 6 shows average one-, three-, and five-year rating transition rates from 1981-2018. Each cell indicates the average percentage of ratings maintaining the same rating category at the end of each time horizon. The rows indicate the starting rating, and the columns show the rating category after each designated period.

Note the large percentages of withdrawn ratings ("NR," or not rated) as time increases. The high frequency of ratings withdrawn for redemption, maturity, or any other reason makes longer time horizons of up to 20 years impractical for infrastructure. This is also a byproduct of our analysis being built on issue-level ratings, which tend to be paid off and thus move to "NR". In contrast, our nonfinancial corporate ratings are issuer credit ratings and typically remain active much longer than the ratings on any of the underlying issues.

The highest values in the transition matrix are along the diagonal, indicating that as expected, most ratings do not move in a given period. However, by reading to the left of the diagonal and the right of the diagonal, one can determine the ratings that have transitioned to higher (left) and lower (right) categories.

In one year, about 3%-9% of investment-grade ratings move to lower rating categories. In three years, about 4%-18% of investment-grade ratings move into lower rating categories. In five years, about 7%-19% of investment-grade ratings are lower. The 'BBB' category is typically the most stable, and 'AA' category ratings are the most likely to move to a lower category at each time horizon.

Table 6

Nonfinancial corporate ratings move more rapidly than infrastructure ratings. In one year, about 4%-9% of investment-grade ratings move to lower rating categories. In three years, about 7%-19% of investment-grade ratings move to lower rating categories, and in five years, about 10%-23% of investment-grade ratings are lower. As with infrastructure ratings, the 'BBB' category is typically the most stable, although 'AAA' ratings are as likely as 'AA' category ratings to move into a lower category at each time horizon.

Not surprisingly, the percentage of ratings that fall to 'D', or default, is higher at almost every category and time horizon for nonfinancial corporates. The high percentage of infrastructure ratings that have been withdrawn, as indicated in the "NR" column, obscures the data and our conclusions. After five years, 40% of infrastructure ratings in the 'BBB' category have been withdrawn, compared with 23% of nonfinancial corporate ratings in the same category. There is no indication of whether the removed ratings would have remained in the same category or moved positively or negatively had they not been withdrawn, but direct comparisons become less precise because of the withdrawn ratings. However, negative transition trends are consistent across all time horizons among surviving ratings.

Table 7

All industries except utilities exhibit negative rating movement at the 'BBB' category. Focusing on the 'BBB' category, which is the largest rating category, allows for comparison between infrastructure subsectors. Oil and gas ratings are the most likely to remain in the 'BBB' category from one to five years. Utilities have positive rating transitions over one year, three years, and five years. Social infrastructure ratings are slightly more likely to fall to a lower rating category than they are to move to a higher category over one year, but are more likely to reach a higher category in three and five years. Power and other infrastructure tend to have the greatest rates of downward shifts at all horizons, with the power sector showing the greatest deterioration.

Table 8

Ratings Volatility

Losses on investment can occur even without a default, and transitions to lower ratings might have implications for investors such as pension funds and other institutional investors restricted from holding speculative-grade debt and, in some cases, even investment-grade debt below certain rating levels.

When we measure net rating changes (upgrades minus downgrades and defaults) as a percentage of the total issue and issuer base over a 12-month period, both infrastructure overall and the broader nonfinancial segment display rating changes in line with economic and default cycles. That said, rated infrastructure generally displays stronger ratings stability than do nonfinancial corporates.

Infrastructure saw its highest rate of credit degradation during the 2001-2003 period, which coincides with its peak default cycle, but also the consequences of the collapse of Enron and market liberalization in U.S. utilities. In terms of net rating changes, this cycle peaked slightly later than that of nonfinancial corporates. Some of this is a product of sector characteristics, such as that infrastructure project financings typically have dedicated debt service reserves and distribution traps, creating a delayed effect in times of broad or sustained economic stress. And as shown earlier, infrastructure has a much higher proportion of investment-grade ratings than do nonfinancial corporates. Even in periods of widespread stress, investment-grade ratings typically see slower credit degradation than speculative-grade ratings.

Since 1992, rating movement has been mostly negative and mostly subtle. To measure the direction and degree of rating change, we subtracted the number of downgrades, multiplied by the average number of notches for each downgrade, from the number of upgrades, multiplied by the notches per upgrade. Dividing this result by the number of total ratings provides a measure of volatility. The total ratings include those that did not change.

This net rating change indicates that infrastructure ratings have typically moved by modest degrees in most periods, regardless of the length of time. The difference in notches between upgrades and downgrades has been 0.11 on a monthly basis since 1981, in favor of downgrades. The power sector stands apart from the rest of infrastructure with a much higher rate of decline in ratings, at 0.31, and for 26 consecutive months in 2001-2003, power ratings had a negative net rating change over 1.00. As mentioned before, this sector has a higher percentage of speculative-grade ratings, which would typically have higher rates of downgrades in any sector.

Finally, project finance infrastructure ratings have been more volatile than corporate infrastructure ratings, with significant declines in three periods, as well as generally steeper declines. The chart below shows the declines in 2001-2003, 2004-2006, and 2007-2013. Only in one period did project finance volatility result in more positive rating movement than corporate infrastructure experienced, from mid-2006 to mid-2007.

Defaults

There were five infrastructure issue-level defaults in 2018 among entities that began the year with active ratings, resulting in an annual default rate of 0.43%. There was also one additional issue-level default from an entity that began the year without a rating, from within the regulated utilities sector in Venezuela, bringing the total default tally for 2018 to six. Three of the defaulting entities were in the U.S., one was in Luxembourg, and another was in Venezuela. Three of the defaults were from the power sector, two were in utilities, and one was in the oil and gas industry. Four of the defaults were in corporate infrastructure, and two were in project finance. There were seven defaults in 2017 and 2016, following one default in 2015.

Since 1981, we have seen 121 rated infrastructure defaults, almost all since 2001. Defaults increased noticeably in two periods, the early 2000s and from the Great Recession through 2017. From 1993-2000, there was just one default in infrastructure, but then there were 38 from 2001-2003. There were 17 defaults, the most on record, in 2002. Defaults have surged from a total of four in 2008. Since then, there have been at least five defaults every year except 2015, when there was one.

Speculative-grade-rated defaults (those with a speculative-grade rating at the start of the year of default) represent 85% of all defaults since 1981 and all defaults after 2008. The only years with significant numbers of defaults of investment-grade ratings were 2001 and 2002, which account for 13 of the 18 investment-grade defaults since 1981. Since the last investment-grade default, in 2008, the speculative-grade default rate has averaged 1.9%.

Table 9

As with other asset classes, default rates in infrastructure are much higher among speculative-grade ratings. In 2002, the rate of speculative-grade defaults reached 10.5%, and the annual rate has exceeded 1% 15 times since 2000. Investment-grade default rates have been below 1% every year except 2001, when the rate was barely higher, at 1.1%.

Corporate infrastructure has lower average default rates than project finance infrastructure. The average default rate for corporate infrastructure is 0.33% since 1981, compared with 0.63% for project finance.

The number of defaults has moved in a similar direction as the number of total downgrades since the late 1990s. This suggests that defaults are not random but reflect rating trends and underlying credit conditions. In addition, there has been a pattern of a change in the number of downgrades preceding a similar change in defaults. The number of downgrades rose sharply every year from 1998-2002, and then defaults spiked in 2001-2003. Downgrades and defaults moved in the same direction each year from 2004-2009. More recent years generally follow the same trajectory. The only exception is 2015, which had just one default but 119 downgrades.

By subsector, utilities have accounted for the highest number of infrastructure defaults, at 59, or 49% of all infrastructure defaults. Entities in the uncategorized group had the second-highest number of defaults, at 28. Power had 22 defaults. From there, numbers decrease considerably, to six defaults in oil and gas, five in transportation, and one in social infrastructure.

We also examined each industry's share of defaults in relation to its share of all ratings. The utility sector's 49% of defaults is close to its 46% share of all ratings. Power defaults are more common than the number of ratings would suggest, at 19% of defaults and 11% of ratings. Merchant power projects are characterized by high market risks (low barriers to entry; merchant pricing risk; unregulated, aggressive leverage; and lower-than-forecast demand), although this is not the case for contracted power. Oil and gas, transportation, and social infrastructure accounted for fewer defaults than their percentage of ratings.

The most overrepresented group of defaults is in the other category--ratings that are not included in the other five groups. These are all project finance ratings, frequently for finance and holding companies.

Infrastructure defaults have occurred mainly in the U.S. Of the 121 rated defaults, 80 have occurred in the U.S., far exceeding the next-closest nation, Argentina, with 10. North America accounts for 68% of infrastructure defaults. Latin America comes second with 17%. EMEA has 15%, and Asia-Pacific has just one default, or less than 1%.

North American defaults dominate most periods. In just one year, 2002, were there significantly more defaults outside of North America than within it. There were 10 Latin American and three European defaults that year, compared with four North American defaults.

The chart below shows the annual default rates by region. Default rates were low until the Asian financial crisis in 1995, and then they fell sharply by 2000. Since then, default rates have remained below 2% in all years until just after the Great Recession.

Historical Default Cycles: Infrastructure Dodges The Financial Crisis

In general, infrastructure saw relative peak default rates in line with those of nonfinancial corporates during the 1990-1991 U.S. recession and again during the 2000 recession. However, the sector made it through the most recent financial crisis relatively unscathed, with a peak default rate under 1%, compared with just under 6% for nonfinancial corporates.

On a trailing-12-month basis, the overall infrastructure default rate was higher than that of nonfinancials only from January 2005 through December 2005, as a result of the Dec. 21, 2005, bankruptcy filing of Calpine Corp. (corporate infrastructure power developer and energy merchant company), which covered nine defaulting instruments in our dataset.

However, infrastructure project finance default rates tend to reach higher levels and remain elevated for longer stretches than default rates for infrastructure corporates (see chart 26). Nonetheless, within both subsectors, default rates are comparably low and have been trending lower over the past five years. The default rate for infrastructure project finance peaked in 2001 at 2.63%, while infrastructure corporates hit a peak default rate of 2.69% in 2001. The peak default rate of infrastructure corporates was largely propelled by high-risk sectors such as power. Excluding the power subsector, the peak default rate of infrastructure corporates drops to 1.94%.

Ratings At Default

Ratings on defaulting entities in infrastructure have shown a high tendency to reach 'CCC'/'C' immediately before default. About 91% of defaulting projects were rated in these categories immediately before default, while 6% were rated in the 'B' category and 2% in the 'BB' category immediately prior to default.

Infrastructure ratings have been significantly less likely to encounter default than nonfinancial corporate ratings. A comparison of cumulative default rates up to 15 years by rating category shows that in just two out of 28 observations do infrastructure default rates exceed those of nonfinancial corporate ratings. The two instances of higher infrastructure default rates are insignificantly different from nonfinancial corporate rates. The average record of higher default rates for infrastructure ratings is 0.11%. In comparison, the rates of default are 6.5% higher for nonfinancial corporates than infrastructure ratings over 23 observations.

Over longer periods, the relative strength of infrastructure ratings grows. By year five, the only rating categories in which the cumulative default rate of nonfinancial corporates does not exceed that of infrastructure ratings are 'AAA' and 'A'. By year 10, the default rates for nonfinancial corporate ratings are higher than those for infrastructure at all rating categories. Default among all 'AAA' ratings in the two groups is rare.

Investment-grade credits have a very similar pattern, with a slight edge over nonfinancial corporate ratings of 0.01% in the first year, followed by an increasing margin in the default rates for nonfinancial corporates over infrastructure through 15 years. Speculative-grade nonfinancial corporate ratings start with a default rate that is 1.82% higher in the first year, growing to 15.55% higher by year 15.

Table 10

Table 11

Project finance infrastructure has higher cumulative default rates than corporate infrastructure, with a larger discrepancy among speculative-grade credits. The speculative-grade cumulative default rate among project finance ratings is 14.9% at 15 years, compared with 7.6% for corporate infrastructure. Among the industries within infrastructure, power has the highest cumulative default rate for 15 years, at 12.4% for all ratings. Social infrastructure is next but far behind, with 3.3%. Utilities have a rate of 2.1%, transportation is at 1.5%, and oil and gas is at 0.85%.

Table 12

Generally, there is a positive correlation between initial ratings and time to default, if default occurs. This holds true within each asset class we examined, but some slight differences across sectors do exist. For example, across all ratings from 'A' to 'CCC'/'C', nonfinancial corporates usually display longer times to default relative to infrastructure and its two subsectors, infrastructure corporates and project finance. On the other hand, in the 'AA' rating category, infrastructure credits display an average time to default of about 24 years, compared with 20 years for corporate nonfinancials.

The shortest time to default in our dataset was for Vistra Energy Corp., which defaulted in April 2014, just 36 days after it initially was rated 'CC'. This was the second default for Vistra Energy, which previously defaulted in 3.5 years after receiving an initial rating of 'CCC'. Conversely, the longest time to default was for El Paso Electric Co., which defaulted in April 1992, 24 years after receiving an initial rating of 'AA'.

Marginal Default Rates

Default may occur at any time during a project's life. We define the percentage of projects that default in a given year of being rated as the marginal default rate for that year. 'BBB' category marginal default rates hold steady over 10 years, and 'BB' and 'B' category rates increase early and then sharply decline. Speculative-grade credits tend to have higher marginal default rates in earlier years and then steadily declining rates. Investment-grade credits have low marginal default rates throughout all years.

Marginal default trends for the entire infrastructure universe are similar to those for nonfinancial corporates, except that infrastructure default rates are usually lower. Marginal default rates for infrastructure ratings in the 'BBB' category peak at 0.28% in year two, while nonfinancial corporate rates reach 0.45% in years five and six. The highest 'BB' marginal default rates are in year four, at 1.02% for infrastructure and 1.83% for nonfinancial corporates. The highest 'B' category marginal default rates are in the second year, at 4.85% for nonfinancial corporates and 2.34% for infrastructure. For all ratings combined, the first year has the highest marginal default rate, at 1.90% for nonfinancial corporates and 0.44% for infrastructure.

Utilities

The 'BBB' category has been the largest for utility ratings since 2000 and now represents 46% of ratings. About 85% of ratings are in the 'A' and 'BBB' categories. Utility ratings have consistently remained above speculative grade, with 90% investment grade being the average. The number of 'AAA' ratings has declined markedly, with one at the start of 2019, down from 13 in 2002. 'AA' category ratings have also fallen in that period, while 'A' category ratings have increased. The utility sector has the second-lowest proportion of speculative-grade ratings within infrastructure, at 12%.

Utility ratings are less prone to being lowered than other ratings within infrastructure. The downgrade-to-upgrade ratio is 1.19 to 1, just below the average of 1.24 to 1 for all infrastructure ratings. Ratings in the 'BBB' category tend to move up more than down over increments of up to five years, and this tendency is more pronounced over longer periods. After one year, 9% of 'AAA' and 11% of 'AA' category utility ratings move into lower categories. In three years, 5% of 'BBB' utility ratings move to lower categories, but 9% move into higher rating categories. In five years, 10% of 'BBB' category utility ratings move into higher categories--the second-highest percentage after social infrastructure.

The utility crisis associated with Enron Corp. had a marked effect on utility ratings and defaults. The rating composition shifted into the 'BBB' category during that time, and from 2000-2003, downgrades outnumbered upgrades by 371. The largest cluster of utility defaults occurred from 2001-2005, when there were 27 defaults--more than 45% of the 59 defaults since 1981.

This turmoil was the result of Enron's manipulation of the power supply market in the western U.S. during the introduction of utility deregulation, which caused unpredictability in energy markets. Enron squeezed energy resources to utility companies while falsifying its financial statements and later would declare bankruptcy and default. Utility companies in California, which contracted with Enron after the state deregulated its local electricity markets, were among the most affected and highest profile. Pacific Gas & Electric Co., in northern California, and Southern California Edison Co. defaulted as well.

Utility defaults occur most frequently in the U.S., and 24 of the past 26 in the sector have been U.S. concerns. The three-year Gini coefficient for utilities is moderately high, at 67%, indicating a meaningful correlation between the rating three years prior to default and the percentage of issues that default.

Infrastructure Oil And Gas

The 'BBB' category is the most common for oil and gas ratings, and in 2006, the 'BB' category became the second most prevalent. In 2013, the 'B' category became the third largest, surpassing the 'A' category. The oil and gas sector has the most ratings in the 'CCC'/'C' category, at eight. About 53% of oil and gas ratings are speculative grade, the highest percentage among infrastructure sectors.

Oil and gas ratings are more likely to move into lower rating categories over most time horizons. Investment-grade ratings move into lower categories, while speculative-grade ratings are more likely to move higher. However, 'B' ratings generally move no further than 'BB'. The downgrade-to-upgrade ratio is 1.08 to 1, the second lowest of the infrastructure industries.

There have been just six defaults within the oil and gas industry, with no evident chronological pattern. Just 5% of all infrastructure defaults are in oil and gas. However, the three-year Gini coefficient for oil and gas ratings is low, at 30.6%.

Transportation

The largest rating category for transportation ratings has been 'BBB' since 2004. The rating distribution has shifted lower following 110 downgrades and 61 upgrades from 2005-2014. Many of the downgrades were connected to sovereign downgrades, since several transportation enterprises are government-related entities, which receive partial support from a sovereign government.

Similar to the power sector, rating movement is more likely to be negative for transportation issues than in most other infrastructure sectors. Between 1981 and 2018, the ratio of downgrades to upgrades was 1.39 to 1, trailing only power ratings. Ratings in the 'BBB' category tend to move down more than up over increments of up to five years, and this tendency is more pronounced over longer periods. In five years, 12% of 'BBB' category transportation ratings move into lower categories, compared with 7% of 'BBB' category ratings that move into higher categories over five years.

There have been five defaults of transportation ratings, the most recent in 2016. The three-year Gini coefficient for transportation is relatively high, at 82%, indicating a very strong correlation between the rating three years prior to default and the percentage of issues that default.

Power

The 'BBB' category has been the largest for power ratings since 2003. Since 2004, at least 20% of power ratings have been speculative grade, which was the percentage of speculative-grade ratings at the start of 2018.

Coal and natural gas prices are a significant contributor to power ratings, and lower prices typically result in lower ratings. As the price of gasoline has remained low for much of the time since 2008, downgrades have exceeded upgrades 178 to 86, with every year except 2014 having more downgrades than upgrades.

Another factor is the model under which the sale of power occurs. In a contracted mode, power is purchased over a long term, usually 30 years. These transactions are more predictable, with less upside or downside. The other version of power generation sales and delivery is merchant, wherein prices are determined on a spot market or other market forum and can vary significantly. This system is generally less stable and more likely to exhibit rating movement.

Power ratings have historically been the most likely to be lowered within infrastructure. The downgrade-to-upgrade ratio is 1.79 to 1, the highest of the infrastructure industries. Power ratings also have moved down more quickly than those in other sectors. About 18% of 'A' power ratings moved to lower categories within one year. In three years, 38% of 'A' power ratings move into lower categories. By five years, 47% of 'A' power ratings moved to lower categories.

On the other hand, power ratings have rarely transitioned to higher rating categories. Over five years, an average of just 0.32% of power ratings move to a higher level from the 'BBB' category.

There have been 24 defaults within the power industry, clustered in two periods, between 2002 and 2005 and between 2013 and 2018. The second concentration, with nine defaults, was related to the lower gasoline prices of recent years. The three-year Gini coefficient for power ratings is exceptionally low, at 43%, suggesting that lower gasoline prices can result in unexpected defaults among higher-rated issues.

Social Infrastructure

The largest number of social infrastructure ratings is in the 'A' category, which has been the predominant category for nearly two decades. All ratings are investment grade, marking the highest proportion in infrastructure. The last year with a speculative-grade rating in social infrastructure was 2016, when there was one.

There have been 57 upgrades and 54 downgrades in social infrastructure, making it the only infrastructure group with more upgrades than downgrades. Since 2012, there have been 40 upgrades and 27 downgrades.

As with all sectors other than utilities, ratings in social infrastructure are more likely to move into lower rating categories over various time horizons. However, after five years, social infrastructure ratings have significant upward movement. This may be the result of stabilization following construction. The movement is moderate, particularly at horizons of one and three years. After one year, half of 'AAA' social infrastructure ratings move into lower categories. All other rating categories have balanced movement after one year. In three years, all rating categories other than 'BBB' have negative rating movement.

There has been just one default within social infrastructure, in 1997. The three-year Gini coefficient for social infrastructure ratings is extremely high, at 99.6%, indicating a strong relationship between ratings and the propensity for default.

Gini Coefficients

The Gini coefficient--a summary statistic of the Lorenz curve--is a measure of the relative ability of ratings to differentiate risk. We believe that comparing Lorenz curves and Gini coefficients is useful. Infrastructure Lorenz curves vary in their similarity to ideal curves, and Gini coefficients fall within a wide range. Over one year, three years, and five years, the coefficients for infrastructure as a whole--at 80%, 70%, and 64%, respectively--show a strong relationship between the ratings and the propensity to default.

The chart below shows the three-year Lorenz curve for infrastructure. The points along the Lorenz curve represent different ratings, starting with bonds in the 'CCC' and lower categories on the far left. The first point indicates that the one-year transition to default was 50% at 'CCC' and lower ratings. As the ratings rise, the number of defaults decreases, yielding points that continue to climb through the remainder of the speculative-grade scale before turning sharply to the right in the 'BBB' category. As investment-grade ratings continue to rise, the vertical distance representing defaults changes little, while the proportion of ratings in the universe increases dramatically.

The Lorenz curve for infrastructure shows an extremely strong relationship between ratings at the beginning of a year and the default experience of the group of ratings. The left side of the Lorenz curve travels vertically toward 100% before slightly turning at 'CCC'/'C' at 32%, meaning that 32% of defaults within a three-year time horizon were for bonds that began the period in the 'CCC' rating category or lower. Meanwhile, 72% of defaults occurred among bonds rated speculative grade (below 'BBB-') at the start of the three-year period.

The table below further illustrates the information in the Lorenz graph. The lowest value in the left column shows the cumulative proportion of defaults at the 'CCC'/'C' category, or 31.88%, and the number to the right is the cumulative proportion of the rated universe--much lower, at 1.48%. This means that 31.88% of the defaults came from just 1.48% of the ratings, all of which were in the 'CCC' or lower category. Moving up the table, one can observe that once ratings reach 'A', representing 82.95% of all ratings, 98.99% of defaults have occurred at 'A' or lower ratings.

Table 13

A closer examination, however, shows the relationship is not the same for all sectors within infrastructure. A three-year horizon is the longest period for a sizable number of issues to remain outstanding before redemption or other cause of rating withdrawal, and social infrastructure has a three-year Gini coefficient of nearly 100%, an extremely high measure that indicates a close fit with the ideal curve. Transportation and utility ratings have high Gini coefficients as well, at 83% and 69%. In contrast, power ratings and oil and gas ratings have low Ginis, indicating that defaults have occurred among higher-rated issues.

Power and oil and gas have Gini coefficients under 50%, well below those of the other groups, due to an unusually high number of defaults of credits that were rated investment grade three years earlier.

Table 14

Regional variance is not as extreme. Canada has an extremely high Gini coefficient over three years, at 99.4%, while Latin America is lowest, at 64%. The Asia-Pacific region and the U.S. have Gini coefficients of 68% and 66%, respectively, indicating a strong relationship between ratings and the propensity for default over a three-year horizon.

Recovery Rates

Ultimate recovery rates for infrastructure debt instruments have been broadly stronger than for nonfinancial corporates overall. Many of the infrastructure corporates and projects that achieved the highest recoveries exhibited high asset quality and low industry risk. Furthermore, regulated utilities specifically tend to show above-average recovery rates (in particular, for senior unsecured bonds), and this sector accounts for a notable share of the defaulted infrastructure debt instruments.

Recovery rates for infrastructure (including bank debt and bonds from corporate infrastructure and project finance) average 72%, which is higher than the 60% average for nonfinancial corporates.

Within infrastructure, corporate infrastructure (excluding project finance) displays a higher average recovery of 75% (from 230 instruments), and more than half of the defaulted instruments recovered 90% or more. This average recovery from corporate infrastructure was notably higher than the average recoveries from project finance and from nonfinancial corporates. About 35% of nonfinancial corporate instruments displayed a recovery rate of 90% or higher.

Meanwhile, average recoveries from project finance instruments are considerably lower than for the corporate infrastructure subsector. Project finance exhibits an average recovery of 62% (from 52 instruments), and the distribution of recoveries is more varied than it is within corporate infrastructure. Nearly as many project finance instruments recovered par or greater as recovered less than 30%. The projects with the lowest recoveries typically exhibited high market risk or encountered technology issues.

Our dataset of recoveries for infrastructure corporates and project finance includes defaulted instruments that were resolved through a debt restructuring, a distressed exchange, or a liquidation and sale of assets. To calculate recovery rates on defaulted projects, we relied on public documents, court filings, and company reports. Because we used public information, we were unable to calculate recovery rates on all defaulted projects. Most of the recovery rates we were able to calculate were from legal jurisdictions, such as the U.S., that published an abundance of postdefault data.

This dataset includes 71 defaulted obligors, affecting 282 debt instruments. While the dataset includes obligors from the emerging and developed markets, nearly 87% of the instruments included in the recovery dataset are from U.S.-based obligors. These include entities that defaulted from 1988-2018. The count of instruments includes senior debt, senior unsecured debt, and subordinated debt. Many obligors have defaulted on a variety of instruments, and some have defaulted more than once, causing the number of observed instrument defaults to far exceed the number of defaulters.

Recovery By Instrument Type

By debt type, the key difference between recoveries of infrastructure and recoveries of nonfinancial corporate debt is in the recoveries of senior unsecured bonds. Senior unsecured bonds in the infrastructure sector have shown average recoveries of 73%, which is considerably higher than the 52% average recovery for senior unsecured bonds from the nonfinancial corporate sectors.

Aside from senior unsecured bonds, the recovery rates for infrastructure debt are much more closely aligned with those of nonfinancial corporates. Senior secured debt (which includes bank debt along with senior secured bonds) from the infrastructure sector shows an average recovery of 77%, which is modestly lower than that of nonfinancial corporates, at 80%. Meanwhile, subordinated debt from the infrastructure sector averages 25%, lower than the 32% average recovery on subordinated debt from the nonfinancial sectors.

Average recovery rates for project finance infrastructure are considerably lower than those of infrastructure corporates. The average recovery for a defaulted project finance instrument is 62%, while the average recovery for an infrastructure corporate entity is 75%.

Within the corporate infrastructure subsector, elevated recoveries for senior secured and unsecured debt largely reflect the contribution from the utility sector. Recoveries from the utility sector's instruments account for close to 45% of the recoveries for the infrastructure corporate subsector, and utilities have the highest average recovery rate, at about 86%.

There are several reasons why utilities tend to have higher recoveries than the other infrastructure industries. With essential assets and as providers of essential services, such as power, water, and gas, utilities often have little or no practical substitute. This supports a business model shielded by regulation, and issuers' ability to add debt is often limited by regulation or secured bond indenture. These characteristics support the very low industry risk for the regulated utilities sector, which is the only corporate sector to have this assessment.

In addition to calculating recovery rates as an average of instrument recoveries, weighted by the number of instruments, we also looked at recoveries on a dollar-weighted basis. For the dollar-weighted averages, we calculated the nominal sum of debt recovered from the pool of defaulted instruments, divided by the total of defaulted debt in the sample for that instrument type.

Dollar-weighted recoveries for the infrastructure sector tend to be lower, on average, than the instrument-weighted averages. However, the dollar-weighted average recovery of 63% for the infrastructure sector overall remains higher than the 56% dollar-weighted average for nonfinancial corporates.

By subsector, the transportation industry has the highest dollar-weighted average recovery rate, of 72%, which is higher than its simple average of 68%. However, this reflects recoveries of just nine instruments. The power sector accounts for the largest share of instruments, with 143, including both project finance and infrastructure corporates, and had the second-highest dollar-weighted average recovery, at 69%.

Recovery Default Type

Recovery rates can also vary with the type of default that the infrastructure entity undergoes. In nonbankruptcy restructurings, which include distressed exchanges, along with defaults that are cured within, or outside of, the grace period, the recovery rates for unsecured and subordinated debt tend to be higher, on average, than they would be through a bankruptcy restructuring.

The average recovery across all instruments is higher, at 83%, following a nonbankruptcy restructuring than the 69% average following a bankruptcy. By debt type, the difference stems from senior unsecured and subordinated debt, which have an average recovery 22 percentage points higher following a nonbankruptcy restructuring. In contrast, senior secured debt experienced an average recovery of 78% following a bankruptcy, which was modestly higher than the 74% average recovery following a nonbankruptcy restructuring.

Table 15

A higher share of instruments from infrastructure and project finance have experienced the highest recoveries, of par or greater, than have nonfinancial corporates. Overall, 40% of defaulted infrastructure debt instruments recovered par or greater, compared with 29.0% of nonfinancial corporate debt instruments.

At the low end of the distribution, just 12% of defaulted infrastructure debt instruments recovered 20% or less, compared with about 25% of nonfinancial corporate debt instruments. However, the sample size of infrastructure recoveries remains considerably smaller than that of nonfinancial corporates.

The distribution of project finance recoveries tends to vary more widely than that of the corporate infrastructure sector. Nearly as many project finance instruments recovered par or greater as experienced negligible recoveries of 30% or less.

Among other projects with higher recoveries, many tend to benefit from characteristics similar to those of regulated utilities. For instance, infrastructure project financings hold essential assets, have stable cash flows, and exhibit low industry risk. In many cases, low industry risk may be supported by long-term offtake contracts, such as power purchase agreements or availability-based payments under a concession, operations and maintenance contracts, or fuel-supply contracts, among others.

The distribution of recoveries within the corporate infrastructure subsector tends to be more highly concentrated at the high end of the recovery range. The majority of defaulted debt instruments from the infrastructure corporate subsector experienced recoveries of 90% or more, and about 43% of the instruments recovered par or greater.

Appendix I: Definitions And Methodology

A central question in creating this study was how to determine which entities to include in the dataset. Infrastructure investment is broadly defined as investment exposure (debt or equity) to real assets vital to a country's economic development and prosperity that provide essential services for the orderly operations of an economy, such as transportation networks, health and education facilities, communication networks, and water and energy distribution systems. Key risks are in design, permitting, construction, operations, volume, and maintenance, with debt repaid predominantly by cash generated from the assets themselves.

Characteristics of infrastructure entities vary, and the range of risks managed by infrastructure investments is broad (such as greenfield/brownfield, contracted/regulated/merchant, and availability/demand risk). Characteristics sought by investors in infrastructure include longevity, strong competitive advantages, high barriers to entry and monopolistic characteristics, low volatility, differentiation between return and volatility, and inflation-linked or predictable cash flows.

This second annual infrastructure default and rating transition study continues the analysis of the inaugural default study from last year, and expands on and supersedes project finance default studies published by S&P Global Ratings in previous years. The data herein encompass project finance ratings from past reports and add ratings from other segments within infrastructure. The advantage of this report and the one from last year over its predecessors is that they broaden the perspective of the former studies and include a larger dataset. This expansion enables more conclusions, increases the statistical validity of the findings, and enables comparisons between industries, sectors, and time periods.

Our long-term infrastructure default and rating transition study uses long-term ratings on individual project finance debt issues. For projects with multiple tranches of debt, we used a single rating for all pari passu tranches to try to mitigate the risk of overweighting such projects in the sample set. For projects with senior and subordinated debt with different ratings, we counted each class separately and collapsed multiple tranches of pari passu debt into a single rating.

An infrastructure rating reflects S&P Global Ratings' opinion of the obligor's ability and willingness to meet its financial commitments on time, and it generally indicates our opinion of the likelihood of default regarding the specific rated issuance. Unlike issuer credit ratings, project finance ratings consider the value of collateral and recovery in determining the rating.

We analyzed the rating histories of corporate infrastructure and project finance credits that S&P Global Ratings first rated between Dec. 31, 1981, and Dec. 31, 2018. We categorized these ratings into one of five subsectors: utilities, power, oil and gas, social infrastructure, or transportation, with other obligors grouped in a separate category.

The analysis excludes ratings based on the guarantee of another entity and obligations wrapped by a monoline insurer, unless the obligations bear an S&P Underlying Rating (SPUR), in which case we included the SPUR. Corporate issuers, structured finance vehicles, public-sector issuers, and sovereign issuers are the subjects of separate default and transition studies, so we have excluded them from this study. The infrastructure data make up a sufficiently large set, although individual sectors are small, so that a few defaults or rating transitions can have a sizable effect on portfolio performance within those groups.

Withdrawn ratings

When a rating is withdrawn, it is changed to not rated ("NR"). Issue ratings are withdrawn when an obligation is repaid or at the request of the issuer. S&P Global Ratings also withdraws ratings when sufficient information to maintain a rating is unavailable. If we withdrew a rating after the issue defaulted, we counted it as a default.

Definition of default

A default is assumed to take place on the date S&P Global Ratings revised the rating to 'D', which could occur when a payment on the issue is missed, a distressed exchange offer is completed, or the issuer filed for or was forced into bankruptcy. When an issue defaults, it is not uncommon for S&P Global Ratings to subsequently withdraw the 'D' rating.

For the purposes of this study, if an issue defaults, we end its rating history at 'D'. For those instances when an issue defaulted and was subsequently upgraded, we entered the rating history after the default into the calculations as a new rating.

Many practitioners use statistics from this default study to estimate "probability of default" and "probability of rating transition." It is important to note that S&P Global Ratings' credit ratings do not imply a specific probability of default.

Static pool methodology

We conduct our default studies on the basis of groupings called static pools. For the purposes of this study, we form static pools by grouping issues by rating category at the beginning of each year, quarter, or month that the database covers. Each static pool is followed from that point forward. All issues included in the study are assigned to one or more static pools. When an issue defaults, we assign that default back to all of the static pools to which the issue belonged.

We use the static pool methodology to avoid certain pitfalls in estimating default rates. This is to ensure that default rates account for rating migration and to allow for default rates to be calculated across multiperiod time horizons.

The pools are static in the sense that their membership remains constant over time. Each static pool can be interpreted as a buy-and-hold portfolio. Because errors, if any, are corrected by every new update and because the criteria for inclusion or exclusion of issues in the default study are subject to minor revisions as time goes by, it is not possible to compare static pools across different studies. Therefore, every update revises results back to the same starting date of Jan. 1, 1981, so as to avoid continuity problems.

Because static pools only include issues with active ratings as of the beginning date of a given pool, we exclude those with withdrawn ratings, as well as those that have defaulted, from subsequent static pools. If the rating on an issue is withdrawn after the start date of a particular static pool and subsequently defaults, we will include it in that static pool as a default and categorize it in the rating category of which it was a member at that time.

For instance, the 1983 static pool consists of all issues rated as of 12:01 a.m. on Jan. 1, 1983. Adding those issues first rated in 1983 to the surviving members of the 1983 static pool forms the 1984 static pool. All rating changes that took place are reflected in the newly formed 1984 static pool through the ratings on these issues as of 12:01 a.m. on Jan. 1, 1984. We used the same method to form static pools for 1985-2016. From Jan. 1, 1981, to Dec. 31, 2018, a total of 669 first-time-rated project finance issues were added to form new static pools, while we excluded 39 defaults and 370 issues with last ratings of "NR" (after they were included in the initial 669 in prior static pools).

Consider the following example: An issue is originally rated 'BB' in mid-1996 and is downgraded to 'B' in 1998. This is followed by a rating withdrawal in 2000 and a default in 2003. We would include this hypothetical issue in the 1997 and 1998 pools with the 'BB' rating, which was the rating at the beginning of those years. Likewise, it would be included in the 1999 and 2000 pools with the 'B' rating. It would not be part of the 1996 pool because it was not rated as of the first day of that year, and it would not be included in any pool after the last day of 2000 because the rating had been withdrawn by then. Yet each of the four pools in which this company was included (1997-2000) would record its 2003 default at the appropriate time horizon.

Transition matrices

Transition rates compare issue ratings at the beginning of a period with the ratings at the end of the period. To compute one-year rating transition rates by rating category, we compared the rating on each entity at the end of a particular year with the rating at the beginning of the same year. An issue that remained rated for more than one year was counted as many times as the number of years it was rated.

For instance, an issue continually rated from the middle of 1984 to the middle of 1991 would appear in the seven consecutive one-year transition matrices from 1986-1991. If the rating on the issue was withdrawn in the middle of 1991, it would be included in the column representing transitions to "NR" in the 1991 transition matrix. Similarly, if it defaulted in the middle of 1991, it would be included in the column representing transitions to 'D' in the 1991 one-year transition matrix.

All 1982 static pool members still rated on Jan. 1, 2019, had 37 one-year transitions, while companies first rated on Jan. 1, 2017, had only one. Each one-year transition matrix displays all rating movements between letter categories from the beginning of the year through year-end. For each rating listed in the matrix's leftmost column, there are nine ratios listed in the rows, corresponding to the ratings from 'AAA' to not rated.

The only ratings considered in these calculations are those on entities at the beginning of each static pool and those at the end. All rating changes that occur in between are ignored. For example, if an issue was rated 'A' on Jan. 1, 2014, and was downgraded to 'BBB' in the middle of the year and then upgraded to 'A' later in the year (with no other subsequent rating changes), this instrument would be included only in the percentage of issues that began the year as 'A' that ended the year as 'A'. This also applies to transition matrices that span longer time horizons. If an issue defaults or if the rating is withdrawn in the middle of the year, then it would be considered rated 'D' or not rated as of Dec. 31 of that particular year.

Multiyear transitions

Multiyear transitions were also calculated for periods of two up to five years. In this case, we compared the rating at the beginning of the multiyear period with the rating at the end. For example, three-year transition matrices were the result of comparing ratings at the beginning of the years 1981-2015 with the ratings at the end of the years 1983-2017.

Otherwise, the methodology was identical to that used for single-year transitions. We calculated average transition matrices on the basis of the multiyear matrices just described. These average matrices are a true summary, the ratios of which represent the historical incidence of the ratings listed in the first column changing to the ones listed in the top row over the course of the multiyear period. Transition matrices that present averages over multiple time horizons are also calculated as issue-weighted averages.

Rating modifiers

We use rating modifiers (plus and minus signs) to calculate upgrade and downgrade percentages, as well as the magnitude of rating changes, throughout this study. However, some transition tables may use full rating categories for practical reasons: The use of a rating category suggests that transitions to 'AA-' from 'AA', for example, or to 'BBB-' from 'BBB+' are not considered to be rating transitions because the rating remained within the rating category.

Issue-weighted statistics

Averages that appear in this study are calculated based on the number of issues, rather than the dollar amounts, affected by defaults or rating changes. Although dollar amounts provide information about the portion of the market affected by defaults or rating changes, we believe issue-weighted averages are more useful measures of the performance of ratings.

Average cumulative default rate calculation

The cumulative default rates in this study average the experience of all static pools by first calculating marginal default rates for each possible time horizon and for each static pool, weight-averaging the marginal default rates conditional on survival (survivors being nondefaulters), and accumulating the average conditional marginal default rates.

We calculated conditional default rates by dividing the number of issues in a static pool that default at a specific time horizon by the number of issues that survived (did not default) to that point in time. Weights are based on the number of issues in each static pool. Cumulative default rates are one minus the product of the proportion of survivors (nondefaulters).

Average change in credit quality calculation

Certain analyses in this study refer to the "average change in credit quality" of a set of structured finance securities over a given transition window. We define the average change in credit quality as the average number of rating notches by which ratings changed during the stated transition window, where we take the average across all ratings in the set (for example, a particular region or sector) under consideration. In this averaging, we count downgrades as a negative number of notches, whereas we count upgrades as a positive number. We consider stable ratings to have undergone a transition of zero notches. We believe this measure acts as a useful summary of the credit performance of, for example, a given sector, since it combines the relative number of ratings undergoing transition with the severity of that transition.

Appendix II: Additional Exhibits

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Related Research

• 2017 Inaugural Infrastructure Default Study And Rating Transitions, Nov. 20, 2018