TICCS® 2020 √ EDHECINFRA
Pillar 1 – Business Risk
Business risk classifications pertain to the business model of infrastructure companies and thus focus on the nature of their revenue stream, and not on other types of cash flows (e.g. costs). Business risk classifications are dynamic i.e. they can change over time as a company’s business model evolves. This classification is assessed on an ongoing basis for companies included in the EDHECinfra universe.
Defining ‘Contracted’ infrastructure companies (BR1)
- A minimum of 50 to 70% of revenues should be contracted for a material period of time going forward from the date of evaluation
- The contracted period is considered material if it represents between 50% and 75% of the remaining asset life.
Hence the two-by-two matrix:
Share of Revenues Contracted
Partially Contracted (BR11)
Fully Contracted (BR10)
Partially Contracted (BR11)
These guidelines are to be applied on a case by case basis. For example, a company that enters into relatively short-term contracts but that are expected to renew automatically with a degree of certainty can be considered Fully Contracted if this pattern is expected to continue for the rest of the firm’s life. Conversely, a company that corresponds to a 50-year asset (say, a bridge) with a 25-year revenue contract that is not expected to be renewed would be considered Partially Contracted.
Contracted revenues may be linked to an index. This is considered an attribute of the company’s business risk classification but not a category in itself. As a result, TICCS® does not distinguish between contracted revenues that are index-linked and contracted revenues that are not.
Defining ‘Merchant’ infrastructure companies (BR2)
- The company’s business is not regulated in the sense of the BR3 class (see below).
- Less than 50% of the company’s revenues are contracted for less than 50% of the remaining asset life (see above).
Defining ‘Regulated’ infrastructure companies (BR3)
- The business is regulated by a third party (which may or may not be independent from the local or central government)
- Regulation pertains to the business model of the firm e.g. tariffs, CapEx, return on capital, but not to other regulated aspects of business activities e.g. health and safety, which are not specific to infrastructure.
Pillar 2 – Industrial Activities and Assets
Defining Industrial Activities
The classification of any firm under this pillar should always start at the asset subclass level. The remaining classifications (Industrial activity classes and super-classes) simply flow from the asset sub-class level.
While infrastructure companies tend to own only one type of industrial asset, even a single asset, some companies can have multiple types of assets e.g. a power generation unit and a water treatment plant. In this case, the firm in question may be categorised in multiple industrial activity classes or super-classes.
Identifying Industrial Assets
TICCS® includes a detailed definition of each type of industrial asset considered under the second pillar.
Minimum investment size
Because infrastructure assets are understood to represent a sizeable investment requiring a long-term repayment period, a minimum cumulative capital expenditure of USD50m (in 2005 dollars) is added as a filter in the EDHECinfra universe.
Pillar 3 – Geo-economic Classification
The TICCS® Geo-economic classification aims to capture how any infrastructure company may be impacted by the business of other infrastructure companies (correlation in business risk). Two infrastructure companies may be very far apart in space but very closely related business-wise, and vice-versa.
This is in part related to the firm’s business model, thus:
- Any fully contracted company (BR11) would be exposed at the level of the contract counterparty e.g. the national government for a road concession in France (GE3), a subnational entity for a Hospital PFI in the UK (GE4).
- A partially contracted company (BR12) can be exposed to two different levels of geo-economic risk e.g. an LNG terminal with a national off-taker (GE3) and a spot market exposure (GE1)
- Merchant companies (BR2) are the most exposed to geo-economic risks
- Companies in the Transport (IC60) and Data (IC50) industrial classes like large airports and ports and cable companies are exposed to the global economy (GE1)
- Certain toll roads or ports and airports are exposed to regional economic fluctuations (GE2)
- Most merchant infrastructure is linked to the national or subnational (e.g. ring road) economy.
- Regulated companies (BR3) are exposed to their regulator, which is typically a national entity (CG3) but not necessarily.
Pillar 4 – Corporate Governance
The distinction between projects and corporates aims to capture expected differences of behaviour between firms. These differences are primarily driven by the purpose for which the firm was created and the balance between the control rights of equity owners and those of external creditors.
Defining Infrastructure ‘Project Companies’ (CG1)
Single-project vehicles (SPVs) or companies are identified thus:
- The company was created (or activated) for the purpose of holding an infrastructure asset or assets in the context of a single contract or tender;
- Its financing was raised for the sole purpose of developing and operating this or these assets;
- External financiers (when they are present) have significant control rights including contingent control rights (step-in rights);
- Its business model has finite life (expected end date) tied to the asset or contract life.
Projects may or may not be exposed to significant creditor oversight. The difference between the CG11 and the CG12 classification is determined by the presence of external senior debt in the capital structure.
A collection or portfolio of single-project companies continues to be a collection of individual projects and does not become a corporate entity.
Defining Infrastructure ‘Corporates’ (CG2)
Infrastructure Corporates are companies that do not meet the criteria to be classified under CG1. They are typically part of a larger group of companies and benefit from financial and revenue support from this group.
Choice of corporate entity
The corporate entity to be considered should be the one that best represents the infrastructure business as a whole. In other words, TICCS® does not determine whether the HoldCo, BidCo or ProjCo should be considered. This is a matter of judgement to be exercised on a case-by-case basis, depending on the nature of these corporate structures. For example, if the HoldCo carries most of the debt related to the underlying investment (e.g. Heathrow) then it would be considered the most relevant level for the purpose of identifying or classifying infrastructure investments.