Infrastructure debt proved to be a highly resilient asset class throughout the 2020/21 pandemic crisis. In this context, we expect that issuers of crossover-rated infrastructure debt (low BBB to mid BB) will gain attraction.
“As a result of the prolonged low interest-rate environment, investors with long-term liabilities (e.g. insurers, pension funds) are seeking alternatives to low-yielding government or covered bonds in order to reduce the impact of duration mismatches on their guaranteed payments,” says Matthias Peetz, analyst at Scope Hamburg.
“Infrastructure investments are naturally illiquid but generally characterised by predictable and stable long term cash flows, with typically low correlation to other assets and often investment-grade credit risk profiles, hence a perfect fit.”
“Sector-wide experience shows that the historic 10-year cumulative default rate for infrastructure debt is lower than for equivalently rated corporate debt, and that the average historic ultimate recovery rate of around 80% is higher than average,” Peetz adds.
Following the global financial crisis, European banks retrenched from long-term funding markets due not only to the flattening interest-rate curve (ECB monetary policy) but also because of stricter capital adequacy rules under the Basel III framework. The European Insurance and Occupational Pensions Authority (EIOPA), on the other hand, notes that European insurers have been increasing their exposure to more illiquid assets such as infrastructure, real estate and even equity.
“Our perception is that actual investment activity in infrastructure debt remains relatively cautious and we think that regulatory refinement of asset classes and market pressure will direct investors to accept more risk such as greenfield or merchant infrastructure, refinancings or subordinated structures (junior secured, mezzanine, securitisation),” says Peetz.