Last Updated: December 16, 2016

Listed Infrastructure Funds
1.

OutlineThis document describes JCR’s rating methodology for investment corporations (“listedinfrastructure funds”), investment corporation bonds or borrowings by investment corporations thatare listed on Tokyo Stock Exchange (“TSE”).
TSE established an infrastructure fund market on April 30, 2015 for listing funds that invest ininfrastructure facilities such as solar power generation facilities against a background of thefollowing: (i) Use of funds of private sector and its know-how are increasing required forimprovement and management of infrastructure on behalf of public investments by the government
and local bodies due to constraints on the financial conditions of the latter and necessity ofmaintenance/ renewal and new investment of infrastructure, and (ii) Investors’ interests ininfrastructure investments as a stable asset class that is not easily affected by economic trend areincreasing from a perspective of diversification of asset investment.
Infrastructure fund market is based on framework of REIT market. This market targets
investment corporations or investment trusts with investments in infrastructure facilities such as
solar power generation facilities and others in the same way as REIT market where investment
corporations or investment trusts with investments in real estate such as office buildings andcondominiums are listed. Listing regulations on infrastructure fund market are set based on
characteristics of infrastructure fund market. Taking investment corporations as an example,investors in infrastructure assets (owning investors in cases of direct investment and leasing
investors in cases of leasing) are investment corporations, and decision on investment (assetmanagement) is entrusted to an asset management company1. On the other hand, operators
assume roles of maintenance and management of individual infrastructure assets.
Infrastructure funds include non-listed funds as well as listed infrastructure funds on TSE. JCR
has already rated such non-listed funds2. This document describes JCR’s rating methodology forlisted infrastructure funds described above based on their characteristics.

1

Asset management companies are required to be members of The Investment Trusts Association, JapanAs an example of private funds, JCR has been rating claims for return of Tokumeikumiai investment forterm ship investment funds I to III since 2010. JCR rates many project finance instruments for solar power
generation.
2

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http://www.jcr.co.jp/en/(Chart 1) Differences between the infrastructure fund market and the REIT market(Source) TSE Website
2.

Funds Structure

While investment corporations are investors for infrastructure assets, management of infrastructure
assets is conducted by operators and not by infrastructure funds. For overseas funds and private
funds, corporations under umbrella of infrastructure funds often own and manage infrastructure
assets. In Japan, under the laws and regulations related to the Act on Special Measures
Concerning Taxation, investment corporations are required to have renewable energy facilities as
their target assets and to manage such facilities through lease method to meet conditions for theirconduit status3 where they can deduct their dividend payments in order to eliminate double taxation
between investment corporations and investors.
As cash flows of infrastructure funds rely on management of infrastructure assets, listing rules toensure appropriate and stable infrastructure fund management and disclosure rules on operators
who assume management of infrastructure fund are defined at TSE.
Target Infrastructure for listed infrastructure funds are limited to facilities, for which 1 year, inprinciple, has passed since commencement of operations and stable earnings are being generated.

3

Infrastructure assets applicable for other specified assets (typically real estate) may enjoy conduit status fortax purposes without abiding by special requirements for renewable energy facilities.
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http://www.jcr.co.jp/en/(1) Example of Structure of Listed Infrastructure Funds for Investment Corporations(Chart 2) Structure of TSE Listed Infrastructure Funds(Source) TSE Website(2) Investment Assets
Under TSE’s listing rules, ratio of core assets (assets that are equal to directly held infrastructure
assets) to the total assets under management shall be 70% or more, and ratio of core assets,related assets (assets that illustrate returns from infrastructure assets), and current assets to thetotal assets under management shall be 95% or more. In light of the requirements for conduit status
described above, investment targets will be exclusively renewable energy facilities for the timebeing.
(3) Assumed Infrastructure Facilities(i) Assets Defined under Listing Regulations
Renewable energy facilities (solar power, wind power, biomass, geothermal heat, etc.)
Right to operate public facilities (Concession)(ii) Target Assets Defined under Enforcement regulations of Listing Regulations
Transportation related (energy ship, road, railway, port facilities, airport)
Energy related (electric facilities (power plants), gas facilities, oil/ gas pipeline)
Other (water supply and sewage services, electrical telecommunications facilities, wirelessequipment)
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3. Possible Risks(1) Infrastructure-specific Risks
Site related:

Is site ensured firmly for the assumed management period? Are there anyproblems with boundary confirmation? Are there any problems with relations withland owners or residents in the neighborhood?

Location:

Ensuring of access to necessary infrastructure including road, water supply andsewage services, electricity, and risks in relation to natural disasters such as storm
and flood damage, earthquake, tsunami, and intensity of solar radiation and its
variability in cases of solar power.

Development/ Operation: Asset impairment/ destruction due to accidents/ disasters caused byfacility design or management, degradation, performance guarantee
by facility manufacturers, etc. for equipment used, fluctuations in cash
flows due to operational skill
Inflation:

Substantial drop of revenue, increase of expenses and financing cost, etc.

Management Cost:

Increase of costs including raw materials, land rent and land cost due toindividual factors

Performance Risk:

Suppliers, customers, etc.

(2) Risks related to framework of Infrastructure Funds and feed-in tariff (“FIT”) system
Requirements for Conduit Status: Under the laws and regulations related to the Act on Special
Measures Concerning Taxation, in cases of renewable energy facilities as a target asset,
investment corporations are required to manage such facilities through lease method for conduit
status, namely a factor for permission for treatment of elimination of double taxation between
investment corporations and investors through deductibility of their dividend payments. Period inwhich conduit status is permitted is limited to 20 years. As long as the current framework continues
into the future, it is considered that as termination of period, in which investment corporations canenjoy conduit status, approaches, a possibility of decline of yield on dividend payments after thetermination will be perceived. A possibility that this expectation may have the fund’s financing andcapital increase can be a risk.
FIT system: The current FIT system will end at the end of March 2021. In what ways the FIT pricecan be determined in the future will have a significant impact on feasibility of renewable energy
facilities which depend on the FIT system. It is also important whether the FIT system can beextended or how electricity sales in electricity market that do not rely on FIT can be developed.
Under the electricity system reform that is discussed by the central government, investment burdenof thermal power as back-up power capacity for solar power, etc. is also being discussed. There arealso risks that a new framework for the electricity system to be introduced may directly or indirectly
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have impact on profits of solar power generation business.
Fund management by asset management companies: Issues in relation to investment policies andcapacity to carry out those policies of asset management companies: A possibility that infrastructure
is purchased with inappropriate price in cases where sponsor is seller of infrastructure and at thesame time is involved with asset management company, and lack of preventive measures against
conflict of interest(3) Risk in relation to Financing
Constraint on Capital Increase due to Disorder of Capital Market: A possibility that purchase ofinfrastructure is restricted by a worsening of infrastructure fund’s financial level or by keeping acertain financial level.
Refinancing when financial market is in disorder: Concentration of repayment schedules and lack ofmeans to ensure liquidity such as establishment of commitment line
4. Rating Methodology(1) Analysis Points
Given that listed infrastructure funds have many infrastructure projects under its operations, thefollowing can be points for making analysis of them: (i) assessment of feasibility of individual
projects as in the case of project finance; (ii) assessment of portfolio as assembly of individualprojects; (iii) capacity of asset management company; (iv) capacity of operator for individualinfrastructure assets; (v) financial management policy: (vi) sponsor; (vii) performance andmanagement of infrastructure facilities; and (viii) tax.
(i) Individual Infrastructure Projects
JCR assesses feasibility and characteristics of individual investment projects for individual
Infrastructure assets such as solar power, wind power, biomass, airport, road, etc.
(ii) Portfolio
JCR assesses portfolio’s cash flow generation capacity, stability/ variability and degree ofdiversification of projects (including geography, use, off-taker, use period, suspensionperiod, etc. ). In cases where there are projects with high disaster risk or operational risk, inparticular, JCR confirms that whether investment corporations can go on repaying theirdebts using cash flows from projects in operation, even if such risky projects aresuspended. JCR checks total cash flows from individual investment projects and theirstability. Under the structure, cash flows of investment corporations rely on rent generated
from infrastructure that is leased to operator. For this reason, JCR also examines carefully
conditions under leasing agreement (calculation method of rent, cancellation before expiry,
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etc.).
(iii) Asset management companies
Fund management performance significantly depends on (i) an appropriate acquisition
price and (ii) an appropriate/ conservative management policy. Capacity to acquire
infrastructure is capacity to purchase good projects for appropriate volume with anappropriate price for a long period of time. Capacity to identify good properties as well as
capacity to search for and create projects is also required. Investment corporations invest
in projects structured by their sponsors and third parties. Sourcing of such projects, due
diligence management system and management philosophy are extremely important. JCR
also examines growth strategies, conditions of pipelines supporting such strategies, way ofasset diversification in the medium and long run, whether they concentrate its assets tospecificasset types, handling after termination of the FIT period, etc.

(iv) Operator
Appropriate management, control, repair, and others are required for infrastructure assets
to ensure cash flow generation capacity, maintenance of performance and safety for a long
period of time. Even in cases of solar power plants which do not require much works,
maintenance work including periodic inspection and mowing is essential, because suchplants are sometimes located in a remote mountain area or at the coast. JCR examines
carefully whether the operator can appropriately manage facilities as an operator, whether
it can fast recognize abnormality when any of abnormality occurs and has knowledge andcapacity to take necessary actions.
(v) Financial Management Policy
JCR pays attention to appropriate maintenance of liabilities/ capital in line with increasing
asset conditions, and the following are the points for this purpose:-

Asset conditions and leverage control through capital increase, borrowings or issue ofInvestment corporation bonds-

Diversification of due dates of borrowings and investment corporation bonds anddiversification of maturity periods-

Capacity to tackle fluctuations in financial market and contingency plan for refinancing
risk-Covenants, available capacity and existence or non-existence of collateral(vi) Sponsor
Sponsor will be involved with activities of investment corporations in terms of bringing ofinvestment projects, asset management, operator, etc. In cases where investment
corporations significantly rely on sponsor’s capacity and human resources, assessment ofsponsor’s capacity to manage business and business continuity will be reflected increditworthiness of investment corporations for infrastructure funds.
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http://www.jcr.co.jp/en/(vii) Performance and management of Infrastructure Facilities
Ensuring sufficient performance through initial design/ construction is important for
infrastructure assets. Recovery of performance by repairs later is considered difficult inmany cases from economic and technological perspectives. Unlike in the case of REIT’scommercial facilities, these infrastructure assets are located sometimes in a tough naturalenvironment, for example, in a remote mountain area or at the coast. Preparations fornatural disasters and flood disasters should be watched in light of Japan’s climate.
(viii) Tax
Changes in tax system have a significant impact on fund’s management policy. JCR takes
into account that changes to the current requirements for conduit status expected in thefuture can have impact on assessment of individual funds and on overall market trend forinfrastructure funds as well.
(2) Incorporation into Rating(i) Individual Infrastructure Projects
JCR assesses listed infrastructure funds based on the points described above in terms ofmany projects as a bottom structure, portfolio as an upper structure above this structure,abilities of sponsor, asset management company and operators as parties to the overallstructure.
(Chart 3) Image of Infrastructure Fund

（Investment Corporation）

TotalAssets

Investment Portfolio

Infrastcuture a

Inf rastcuture b

Inf rastcuture c

Inf rastcuture
・・・

CFvariabilit y

CFvariability

CFvariability

CFvariability

feasibility

feasibility

feasibility

feasibility

Location

Location

Location

Location

Equipment

Equipm ent

Equipm ent

Equipm ent

SponsorAsset
Management
Company

Operator a
Operator b
Operator c

Cus tomer

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LoanBonds

Credit Investors

Capital(InvestmentUnits)

Equity Investors

(ii) Whether investment corporations can realize their growth strategies and diversification
effects and whether they can continue appropriate repairs depend on knowledge andknow-how of sponsor, asset management company and operator. For this reason, JCR
assesses them in terms of qualitative factors, track records, fullness of system, etc.
(iii) JCR assesses financial strategies and capacity to carry out such strategies for investment
corporations. JCR checks management companies’ financial strategies including future plansfor borrowings and bond issuance, diversification of repayment periods, measures against
refinancing risks such as establishment of commitment line, plan for capital increase, etc. JCR
also confirms their preparations for cases where they encounter market disorder or timing isoff for capital increase. It is important to confirm policies such as a target debt service
coverage ratio (DSCR) level, content of covenants, collateral 4 , etc. JCR considers
management companies are required to make a decision on financial management at anappropriate time and to well communicate with markets through investor relations and othermeans that allows the first requirement.
(iv) Financial Analysis
As an indicator for profitability for funds, portfolio NOI yield is important. As indicators forfinancial stability or certainty of interest and principal payments during the term, JCR places
much value on DSCR or loan life coverage ratio (LLCR). JCR examines whether the funds
can ensure a required level of DSCR and LLCR under stressful conditions. LTV ratio is anindicator based on asset liquidity (sale possibility in secondary market) and there are only afew cases for sales of infrastructure assets as compared with real estate, aircraft or ship.
There is also little information that can be used for check of appropriateness of selling prices.
From these perspectives, JCR considers it is not appropriate to take LTV ratio as a mainindicator for ratings on infrastructure funds.

4In cases where ratio of secured debts to total debts or ratio of pledged assets to total assets is high, JCR
may incorporate subordination feature for individual borrowings.
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Because of the possibility of human or mechanical error as well as other factors in the information herein, JCR makes norepresentation or warranty, express or implied, as to accuracy, results, adequacy, timeliness, completeness or merchantability, orfitness for any particular purpose, with respect to any such information, and is not responsible for any errors or omissions, or for
results obtained from the use of such information. Under no circumstances will JCR be liable for any special, indirect, incidental orconsequential damages of any kind caused by the use of any such information, including but not limited to, lost opportunity or lostmoney, whether in contract, tort, strict liability or otherwise, and whether such damages are foreseeable or unforeseeable. Informationherein is statements of opinion, and not statements of fact as to credit risk decisions or recommendations regarding decisions topurchase, sell or hold any securities such as individual bonds or commercial paper. JCR retains all rights pertaining to this document.
Any reproduction, adaptation, alteration, etc. of this document, is prohibited, whether or not wholly or partly, without prior consent ofJCR.

Japan Credit Rating Agency, Ltd.
Jiji Press Building, 5-15-8 Ginza,Chuo-ku, Tokyo 104-0061, Japan
Tel. +81 3 3544 7013, Fax. +81 3 3544 7026

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