CREDIT RATING AGENCIES
Investors in bonds generally do not get really involved in the due-diligence process and rely more on the lead manager and rating agency to carry out the work. The credit rating agency carry out an independent review of the risks of the project and based on which the rating agency assigns the bond a credit rating. This review is similar to the due diligence carried out the banks. Carrying out the due diligence in this manner is also more cost effective for the bond holders as project-finance bonds form a small part of the bond investors' portfolio.
Credit ratings by the leading rating agencies such as Standard & Poor's and Moody's vary from prime credit level of AAA/Aaa to minimum 'investment grade' rating of BBB-/Baa3. The gradations of the rating levels of the above-mentioned rating agencies are given below. Most of the PPP project ratings are at the lower end of this range.
After getting the rating, the lead manager prepares the bond prospectus similar to the information memorandum prepared for the loan syndication. The work done by the lead manager and credit ratings reduce the need for due diligence by the bond investors and the bond investors can decide to buy the bonds without the need to do a lot of work provided, the bond rating fits the bond investor's maximum risk profile.