1. INTRODUCTION

As JCR Eurasia Rating, the main issues we consider in project evaluations and rating analyzes are;

• The Project Owners & Sponsors
• Project Structure
• The Completion Risk 
• The Operating and Technology Risk 
• The Market Risk
• The Funding & Financing Risks
• The Political & Regulatory Risk
• The Force Majeure Risks

Those titles shall be based on.  

2. The Project Owners and Sponsors

Under this title, those sponsoring the project and those owning the project’s past experience is being examined and assessed. In addition, the financial strengths and risks of the organizations providing guarantees to the project are examined.

3. THE PROJECT STRUCTURE

The cash flow to be generated by the project, the capital structure and the legal status are examined under this heading. In the evaluation methodology of investment projects of JCR Eurasia Rating;

The economic life of the investment, which has a shorter physical life than the physical life of the investments, is taken as basis. As it is known, physical life covers the period of actual production by performing technical works and activities. The economic life means the time an investment can be used beneficially in production. As a rule, the economic life of fixed asset investments is at least 1 year. It is not possible to determine a general period for the investment’s economic lifetime. Especially for sectors where technological developments and innovations are fast, the economic lifetime can be very short. On the other hand, the validity of forecasts exceeding ten years, even in a balanced economic life, is controversial. For this reason, only ten-year estimates are used in project evaluations with an economic life of more than ten years.

The  salvage value is the market value of a fixed asset at the end of its economic life. The salvage values of all investments at the end of their economic life affect investment decisions. Therefore, accurate estimation of salvage value is important. The cash inflow that the salvage value will provide is added to the cash inflow that will be provided at the end of the economic life of the investment.

During the determination of the minimum efficiency ratio(return on investment) expected from the investment; the revenue ratio on the market, the interest rate, the efficiency ratio of un-risky investments, the degree of risk of the investment, the risk premium expected by the owners and the shareholders should be taken into account. In fact, an important part of those factors affect the capital cost. The minimum efficiency expected from the investment is being considered as the capital cost. In other words, the expected rate of return from the investment is expressed as the income from which the capital can be earned with the lowest risk.

The assessment of the projects are being made under certainty and uncertainty assumptions. Under assumptions of certainty, it is assumed that the estimates made about the project will show certainty. In general terms, this assumption is that there will not be many major changes in the internal or external environment of the operating environment in the future. In the uncertainty assumption, it is accepted that the estimates made about the investment may change with certain probabilities. Under the assumption of certainty, almost all Project Evaluation Methods are used that take(and also do not take) into account the time value of money. Under uncertainty assumption, some sensitivity analysis, simulations etc. are being used.

Among methods not taking into account time value of money;  

• ARR-Accounting rate of Return(Efficiency) ratio and
• Payback Period

methods are being used. If the amount obtained by calculating the Average Profitability Ratio of the capital is greater than the average cost of the capital, the relevant investment is deemed appropriate and the positive perception of the project increases as the size increases. By calculating the Payback Period, the period in which the investment will be repaid with the cash flows to be provided is determined.

Among methods not taking into account time value of money are;

• The Net Present Value Method, 
• The Internal rate of Return, 
• The Profitability Index, 
• MIRR- The Modified Internal rate of Return, 
• XIRR and XNPV,  
• The Discounted Payback 
• The Risk Determination of the Project, 
• Method of Determining Risk-Free Incomes Equal in Value to Risky Incomes.  

Net Present Value Method is the reduction of the expected cash inflows and outflows from the Project to a common time period (today) with a certain discount rate (which is the minimum internal rate of return required from the investment, in other words, the cost of capital).  The result found being positive increases the project’s acceptability. The most important aspect of the application of the Net Present Value method is to determine the correct discount rate. There is an inverse relationship between the discount rate and the Net Present Value to be calculated. When the discount rate increases the Net Present Value decreases and when the discount rate decreases the Net Present Value increases. The discount rate to be determined should not be lower than the capital cost. Besides, the risk carried by the project, the interest rate valid on the capital market, the average profitability rate of the business, the average profitability rate in similar investment areas, the opportunity cost of the capital, the marginal efficiency of the capital are among considered issues.

The Internal Rate of Return is the discount rate that makes the Net Present Value of the Project equal to zero. If the internal rate of return found is higher than the discount rate accepted as a criterion, the project is accepted.

The Profitability Index Method (Benefit Cost Ratio) is a ratio found by dividing the sum of the present values of the cash inflows to be generated during the economic life of the investment by the sum of the present values of the investment expenditures, and it must be greater than one for the investment to be accepted.

The Risk Determination of the Project, is an analysis of the change and deviation of the conditions from the expected values which have been used as prediction. It determines the Risk of the Project. The standard deviation and variance analysis are used to measure the risk. In this context, scenarios of change in NPV amounts are made by increasing the discount rate.

Within the scope of the method of determining risk-free incomes equal in value to risky incomes, the returns of risk-free assets during the project period are compared with the expected returns from the project. Here, the risk-free return of the same maturity size and the expected return from the project are proportional to each other. The risk-free returns are the government bonds. When the risk-free return/return on the project ratio approaches zero the acceptability of the project gets more difficult. When it gets closer to 1, the probability of the project being accepted increases.

In the modified internal rate of return(MIRR), the discount rate searched for is the one equating the present value of the projects investment and the cash inflows generated by the economic lifetime of the project. If the found discount rate exceeds the capital cost the acceptability of the investment increases.

Whereas with the Economic Value Added method, if the cost of financing of the project (capital cost) is less than the return to be obtained from the relevant project then the project is adding value economically. The difference between the economic value added method and other methods arises in the calculation of the cost of capital. In this method, the cost of capital is the weighted average cost of capital. Therefore, the cost of own resources is also calculated. The profit in the economic terms, is the profit calculated taking into account the cost of equity. As the amount found increases, the acceptability of the project increases.

The discounted payback, is the duration necessary for the generated discounted cashflows to cover the initial investment costs. In other words, the time required for the total amount of cash flows discounted to the initial year at a given discount rate to payback the initial investment cost. Each cash flow is discounted at the beginning of the investment at a discount rate to compensate for the time value of money and the uncertainty of cash flows. This ratio is the capital cost of the investment and it is a ratio compensating the fund providers for the value of time of money and the investments risks. As the uncertainty of the future cashflows increases the capital cost is increasing as well. Payback Period method calculates breakeven point from accounting point of view. But in the discounted payback method the time value of money is taken into account and the breakeven point is determined economically and financially. 

4. THE COMPLETION RISK  

Considering the technological and other general conditions, whether the project can be completed on time, whether the budget projections can be followed, delays that may arise especially from the project contractors, and their ability to start and finish the work on time are examined in this section.

In addition, the status of obtaining legal permits related to the project, the level of coverage of the insurance and the parties of the insurance, the content of the contracts, and the penal conditions determined are also examined under this heading

5. THE OPERATIONAL AND TECHNOLOGY RISK

Under this heading, the possibilities of variability of operational costs and costs in technological needs, as well as the expected developments in the supply conditions of vehicles, materials, raw materials, and labor are examined.

6. THE MARKET RISK 

Market demand analyzes for the outputs of the project, the importance and future of the sector and fields of activity in which the project is involved, as well as the status of other units that may compete with the project, pricing mechanisms and quality of the project outputs are examined under this heading.

7. THE FUNDING & FINANCING RISKS

Planned equity/foreign debt ratio, interest, exchange rate and maturity risks related to the foreign resource supplied or to be procured, the compatibility of the planned cash flows with the foreign credit obtained or to be obtained, and the return on investment of the project are analyzed in this area.

8. POLITICAL AND REGULATORY RISKS

Whether the project and the fields of activity it is involved in are regulated legally, whether a license is required, ownership status, whether it is promoted by a local or central authority, social support status, and country risk are analyzed under this heading.

9. FORCE MAJEURE RISKS

All other risk factors such as seasonal, conjunctural and natural events that may affect the project for legal and natural reasons are analyzed under this heading.

10.    NOTATION

International FC	Local LC	The Project Assessment Level
AAA	AAA (Tr)	Excellent
AA+	AA+  (Tr)	Very Strong
AA	AA  (Tr)
AA-	AA-  (Tr)
A+	A+  (Tr)	Strong
A	A  (Tr)
A-	A-  (Tr)
BBB+	BBB+  (Tr)	Satisfactory
BBB	BBB  (Tr)
BBB-	BBB-  (Tr)
BB+	BB+ (Tr)	Moderate
BB	BB  (Tr)
BB-	BB-  (Tr)
B+	B+ (Tr)	Needs Improvement
B	B  (Tr)
B-	B-  (Tr)	Doubtful
CCC	CCC (Tr)	Weak
CC	CC (Tr)	Vulnerable
C	C (Tr)
DDD	DDD  (Tr)	Failure
DD	DD  (Tr)
D	D (Tr)