Regression analysis

We now use regression analysis to further investigate the explanatory power of different variables in determining the level of realised DSCR. We consider determinants such as revenue risk family, sector, region, leverage and size, financial ratios and project and calendar years.

2.3.1 OLS Model

From prior knowledge and the descriptive statistics presented above, we know that DSCRs have dynamic profiles in project investment time, while they may be impacted in the cross-section by project- specific or macro factors. We first test a simple ordinary-least squares (OLS) regression model using dummy variables for project time ”buckets” (each bucket corresponding to a 5-year period) and calendar year dummies to proxy for the business cycle.

Table 24 in the appendix reports the results. We find that in the contracted family, calendar years have no statistically signif- icant impact on realised DSCRs whereas they do in merchant projects, even though this is not true across all sectors, with energy and oil & gas DSCRs apparently the most affected by the business cycle. In these two sectors, realised DSCRs also exhibit statisti-

Cash Flow Dynamics of Private Infrastructure Project Debt- March 2016

2. Data Collection and Analysis

cally significant and continuous growth in project time (buckets).

Across the board, leverage is a significant and negative explanatory factor for the level of realised DSCR, which confirms our initial hypothesis that the decision to structure projects with higher leverage, signals lower asset risk.

Indeed, while we argued that the initial required or ”base case” DSCR is low (leverage is high) when creditors anticipate low credit risk, a high realised DSCR suggests that the investment turns out to be highly capable of repaying its creditors, especially as these high realised DSCRs are associated with low realised volatility of DSCRs, which is the case for contracted infrastructure.

We also report in Table 9 that our DSCR data exhibits non-constant variance (the Breush-Pagan test rejects the null hypothesis of homoskedasticity), significant auto-correlation (the Durbin-Watson test rejects the null hypothesis of no autocor- relation in the regression residuals) and non-normal residuals (The Shapiro test rejects the null of Gaussian residuals), all of which suggests that linear models are ill-suited to model our DSCR data.

2.3.2 Panel regressions

Next, to control for the impact of a project time separately, we fit a panel regression model using fixed effects for project time9 _{while calendar years and} 9 - i.e. The model fits a different

intercept for each investment year, as

opposed to each firm sectors are controlled for in the cross-

section.

In the most interesting specification, reported in the Appendix in Table 25, we use initial investment calendar years as explanatory variables in the cross-section instead of contemporary year dummies, which greatly improves the power of the model in the case for the merchant family (50% adjusted-R2), suggesting a significant impact of market conditions at the time of financing in setting average DSCR trajectories through the initial choice of financial structuring. The impact is much more muted (i.e. not statistically significant in most years) in the case of the contracted family.

Fixed project year effects are reported in Table 26 for both contracted and merchant projects. Contracted infrastructure tends to have constant project year effects with an average realised DSCR above 2 (exp(0.8)) for the first 15 years of investment, rising towards the end of the period. Merchant projects exhibit a more dynamic and much higher level of average realised DSCR in project time, oscillating between 2.7 and 8 on average.

Finally, we fit the same project time fixed effect panel model replacing calendar year effects with financial ratios extracted from the accounts of the relevant firms. Table 27 in the appendix reports the impact of profit margins, asset turnover (revenue/total assets ratio), cash return on total assets (operating cash/total assets), capex coverage (operating cash/capital expenditures), and capital expenditures to revenue ratio on realised DSCR levels, while Table 28 reports the year fixed effects.

Table 9: Test results for heteroskedasticity, autocorrelation and residuals normality for log(DSCR) ordinary least squares regression.

Test Statistic p-value

Heteroskedasticity Breusch-Pagan 358.305 0.000

Autocorrelation Durbin-Watson 0.857 0.000

Normality Shapiro 0.695 0.000

Profit margin, asset turnover, and cash return on total assets turn out to be highly significant with positive coefficients for the contracted family, and profit margin and asset turnover turn out to be significant for the merchant family. We note the large coefficient for profit margin in contracted infrastructure.

Indeed, the DSCR for contracted projects may be more sensitive to changes in profitability (such as the profit margin) as revenue is largely fixed (contracted), while for merchant projects higher profitability may come at the expense or be the result of lower aggregate revenue leading to cost cutting, leaving the realised DSCR unchanged.

We also note that once we control for annual changes in financial ratios, project year fixed effects cease to be significant except for a rise in realised DSCRs in the later years in the sample of contracted projects and in the earlier years in merchant projects. This is best explained by the fact that the panel is not balanced and suggests that older investments had higher average DSCRs in the contracted family, while more recent merchant projects also tend to have higher DSCRs than the sample average in each investment year.

2.4 Conclusions

In conclusion, the key findings drawn from the descriptive statistics and analysis are as follows:

1. The two DSCR families, contracted and merchant, exhibit different distribution functions, with contracted infrastructure exhibiting a lower DSCR mean and volatility;

2. Realised DSCRs exhibit an investment life dynamic in both families, and tend to go up over the life of the project. This trend is much more pronounced for merchant projects;

3. DSCR realisations up to a fixed quantile can be modelled with a lognormal distri- bution for each family;

4. Realised DSCRs exhibit statistically significant serial auto-correlation;

5. Regression residuals for realised DSCRs exhibit serial correlations, heteroskedas- ticity, and non-normality, indicating the need for a time-varying, stochastic model of the DSCR.

Clearly, descriptive statistics and linear regression models provide some insights about the determinants of the DSCRs, but also fail to capture DSCR dynamics in full. This requires taking an auto-regressive and heteroskedastic process into account. Next, we discuss our approach to build a powerful model of DSCR dynamics.