Funding risk

Funding risk

The risk associated with the impact on a project's cash flow from higher funding costs or lack of availability of funds. See: interest rate risk.

Interest Rate Risk

The risk of loss due to a change in interest rates. Interest rate risk is important to transactions like interest rate swaps. In such a transaction, the party receiving the floating rate will receive a smaller amount should the floating rate decrease. Interest rate risk is also important to bonds; if interest rates rise, the prices of bonds fall. This affects the secondary market for bonds; for example, if one purchases a bond with a 3% interest rate and the prevailing rate rises to 5%, it becomes difficult or impossible to resell the bond at a profit. Finally, interest rate risk is important to project finance. If interest rates rise, funding may not be available for a new loan for a project that has already started.
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The advantage of the pre-funding scenario is that it transfers future funding risk to the capital markets at the inception of the transaction but has the disadvantage of reinvestment risk (negative carry) until the funds are fully deployed in the reinsurance trust.
The rating, however, derives comfort from the low land cost of the project, modest funding risk and the promoter's experience of successfully completing a similar project (Technopolis-I) in the past.
The rating downgrade was prompted by the material increase in long-term funding risks for eurozone sovereigns with high levels of public debt such as Italy and growing downside risks to Italy's economic growth due to a weakening global outlook, the rating agency said.
The ratings agency blamed a "material increase in long-term funding risks for the euro area", due to lost confidence in eurozone government debts.

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