In a new report published yesterday, Fitch Ratings says that its global infrastructure and project finance rating outlooks in 2010 for most sectors are stabilizing and, in some cases, moderately improving. The improvement in outlooks is in the context of an anticipated global scenario of gradual economic recovery throughout 2010 and onward. It is also in part a consequence of the rating actions taken so far, which have been mostly negative to reflect higher levels of credit risk, and of the recognition that a further negative shift is less likely going forward. However, no sector has a definitively positive outlook yet.

The performance of infrastructure assets has proven quite resilient. Despite many negative rating actions, there were few that evidenced significant credit deterioration. Fitch does not expect to materially change its rating approach to project finance as a result of the past two years' observations.

The key driver for rating stability has been cash flow volatility. Those with structurally low volatility such as availability payment structures for social infrastructure or transportation, and contracted power and energy assets have remained stable. The most negatively impacted have been those with considerable market exposure, such as merchant power, and those exposed to discretionary spending, such as airports, maritime ports, and pub companies.

Looking forward, macroeconomic risks remain important. The pace of the economic recovery, the pace of inflation (high or low) and mismatches between revenue and cost growth will impact credit quality. The volatility and level of commodity prices will impact energy and transportation projects.

Counterparty risk remains a factor. While the credit quality of counterparties was affected during this crisis, it provided a greater measure of stability to projects than might have been expected.

A phenomenon to watch is how infrastructure assets in developing economies perform relative to those in developed economies and whether this recovery will be different from prior ones. Emerging markets in general have been resilient to the global financial crisis and are expected to recover stronger than the mature economies in 2010.

Climate change and the impact of related regulation and market factors on credit quality are other factors to watch. While they remain material credit factors, the lack of clarity on how they will impact credit quality means that they currently impact rating outlooks only in a limited way.

The full report, 'Global Infrastructure & Project Finance 2010 Outlook', is available on Fitch's web site at 'www.fitchratings.com'.