Credit FAQ:

How Could The U.K. Guarantee Scheme For Infrastructure Projects Affect Senior Debt Ratings?
Primary Credit Analysts: Michela Bariletti, London (44) 20-7176-3804; michela.bariletti@standardandpoors.com Leila N Butt, London (44) 20-7176-2138; leila.butt@standardandpoors.com Secondary Contacts: Michael Wilkins, London (44) 20-7176-3528; mike.wilkins@standardandpoors.com Frank Gill, London (44) 20-7176-7129; frank.gill@standardandpoors.com

Table Of Contents
Frequently Asked Questions Note Related Criteria And Research

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Credit FAQ:

How Could The U.K. Guarantee Scheme For Infrastructure Projects Affect Senior Debt Ratings?
On April 24, 2013, the U.K. government guaranteed a 75 million loan for the U.K.-based power generator Drax. The loan is intended to part-finance a 700 million project to convert three of Drax's six units at the 4,000 megawatt (MW) plant in North Yorkshire to burn biomass. This project is the first to be guaranteed by the U.K. government through its UK Guarantee Scheme, which was launched by HM Treasury in July 2012. According to HM Treasury, the UK Guarantee Scheme aims to kick-start critical infrastructure projects that may have stalled because of adverse credit conditions. Under the scheme, the government expects that around 40 billion of projects could qualify for the provision of guarantees. These projects could occur in a range of industry sectors including transport, utilities, energy, and communications. Standard & Poor's Ratings Services considers that, if successful, this initiative could further stimulate the U.K. infrastructure project bond market by substituting the U.K. sovereign credit rating of 'AAA' for that of the underlying debt instruments. In this report, we address some of the likely questions from investors regarding how the UK Guarantee Scheme could affect our senior debt ratings on infrastructure project transactions.

Frequently Asked Questions

What is the UK Guarantee Scheme and how could it be applied to infrastructure projects?
We understand that the U.K. Guarantee Scheme was originally expected to provide partial risk guarantees. These would have seen the government underwrite, for example, the construction risk on a project, or the risk to future revenue streams, in a move designed to encourage more institutional investors to enter the market. We understand that the government has further developed the UK Guarantee Scheme, and that it is now planning to provide a number of unconditional and irrevocable financial guarantees to payment obligations of the borrower under the relevant documentation in favor of lenders and/or investors in certain U.K. projects. The current proposal, in our view, resembles to a large extent the form of a monoline insurer's financial guarantee. In project finance, monoline insurers typically provide a financial commitment to make the scheduled principal and interest payments on a bond if the obligor does not.

What are Standard & Poor's criteria for rating sovereign-guaranteed debt?
A guarantee is a form of credit enhancement whereby the evaluation of the creditworthiness of the primary obligor is shifted to that of the guarantor and the terms of the guarantee. Standard & Poor's guarantee criteria identify the circumstances under which a guarantor could be excused from making a payment necessary for servicing the obligations of the guaranteed securities and take those circumstances into account in the rating. Timeliness of payment is a key component of the guarantee criteria. In reviewing a guarantee to determine if the evaluation of creditworthiness should shift from the primary obligor (the

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Credit FAQ: How Could The U.K. Guarantee Scheme For Infrastructure Projects Affect Senior Debt Ratings?

guaranteed entity) to that of the sovereign guarantor, we consider the extent to which: The guarantee is one of payment and not of collection. In other words, the guarantee should be a promise by the guarantor to pay the guaranteed obligation rather than merely a promise by it to pay any deficiency remaining after the beneficiary has exhausted all of its remedies against the collateral and the primary obligors. The sovereign guarantor agrees to pay the guaranteed obligations on the date due and waives demand, notice, etc. The guarantor's obligations under the guarantee rank pari passu with its senior unsecured debt obligations. The guarantor's right to terminate or amend the guarantee is appropriately restricted. The guarantee is unconditional, irrespective of the value, genuineness, validity, or enforceability of the guaranteed obligations. The guarantor waives all other circumstances or conditions that would normally release a guarantor from its obligations. The guarantor also waives its rights of set-off, counterclaim, etc. The holders of the rated notes are beneficiaries of the guarantee. We anticipate that these provisions will be addressed either by statutory instrument (a law, a regulation, or an executive order) or an explicit reference in the guarantee or issuance documentation as opposed to verbal representations.

Are Standard & Poor's criteria for rating sovereign-guaranteed debt met by the proposed U.K. Guarantee standard form?
Based on the draft of the UK Guarantee Scheme document published on the HM Treasury Web site on June 23, 2013 (see Note), we believe the proposed terms and conditions of the guarantee meets our guarantee criteria (see "Rating Sovereign-Guaranteed Debt," published April 6, 2009, on RatingsDirect). As a result, the creditworthiness of an obligation that will benefit from the U.K. guarantee will be shifted from that of the primary obligor to the guarantor. According to our criteria, a long-term rating on a debt issue that benefits from an unconditional and irrevocable guarantee reflects the higher of the rating on the guarantor and Standard & Poor's underlying rating (SPUR).

How does the application of Standard & Poor's guarantee criteria differ for sovereign and non-sovereign guarantees?
There are two key differences, and they are related to a sovereign's intent in extending a guarantee and to potential lack of effective legal redress against a sovereign. First, certain elements of the guarantee criteria focus on limiting the circumstances in which the guarantor may be released from its guarantee obligations. However, when a sovereign extends a guarantee, it is usually doing so to further some public policy purpose. Second, because enforcing a claim against a sovereign could be difficult, analysis of sovereign creditworthinesseither directly or as a guarantorrelies less on legal characteristics and more on willingness issues than is the case for non-sovereign issuers. Sovereigns make laws and can change laws. However, as noted above, where the intent of sovereign guarantees is to support public policy goals, we believe that a sovereign would view reduction or elimination of its guarantee obligations as a last resort.

How might the UK Guarantee Scheme affect Standard & Poor's view of a project's underlying credit quality?
A U.K. guarantee will not affect, per se, our view of a project's underlying credit quality. Within the context of transactions which benefit from monoline insurer's financial guarantees, a Standard and Poor's underlying rating (SPUR) expresses our opinion of the stand-alone capacity to pay debt service on an insured debt issue in accordance with its terms, without taking into account the credit substitution that may reduce default risk. A SPUR is the same as

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Credit FAQ: How Could The U.K. Guarantee Scheme For Infrastructure Projects Affect Senior Debt Ratings?

an issue rating, simply without reflecting any credit substitution provided by a guarantor. We assign the SPUR and conduct surveillance in the same manner as for any non-guaranteed issue rating. Making more SPURs publicly available is one of several steps Standard & Poor's is taking to provide greater transparency.

What is the process by which Standard & Poor's would assign a rating to an obligation benefiting from the UK Guarantee Scheme?
Our rating process is generally similar for all issuers, including corporations, governments, and financial institutions. There may be some differences involving, for instance, the way the process is initiated and conducted, the rating criteria and assumptions that apply, as well as the specific kinds of information that analysts review. As an illustration, the rating process for an issuer typically includes the following steps: Contract: the issuer requests a rating and signs an engagement letter; Pre-evaluation: we assemble a team of analysts to review pertinent information; Management meeting: Analysts meet with the management team to review and discuss information; Analysis: analysts evaluate information and propose the rating to a rating committee; Rating committee: the committee meets to review and discuss the lead analyst's rating recommendation and presentation and then votes on the credit rating; Notification: we generally provide the issuer with a pre-publication rationale for the credit rating for fact-checking and accuracy purposes; Publication: we typically publish a press release announcing the public rating and post the rating on www.standardandpoors.com; We maintain surveillance of rated issues/issuers. Further information on our rating process is available at www.standardandpoors.com

Note
Further details of the UK Guarantee Scheme can be found at https://www.gov.uk/government/publications/uk-guarantees-scheme-key-documents

Related Criteria And Research

The articles listed below are available on RatingsDirect. Guarantee Criteria--Structured Finance, May 7, 2013 Guarantee Default: Assessing The Impact On The Guarantor's Issuer Credit Rating, May 11, 2012 Project Finance Construction and Operations Counterparty Methodology, Dec. 21, 2011 Timeliness of Payments: Grace Periods, Guarantees, And Use Of 'D' And 'SD' Ratings, Dec. 23, 2010 Rating Sovereign-Guaranteed Debt, April 6, 2009 Updated Project Finance Summary Debt Rating Criteria, Sept.18, 2007

Additional Contacts: Infrastructure Finance Ratings Europe; InfrastructureEurope@standardandpoors.com SovereignEurope; SovereignEurope@standardandpoors.com

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