Markets

What are infrastructure debt investments?

Challenges faced by traditional assets classes mean that interest in private asset investments, such as infrastructure debt, is rising. But how does it work?

28/12/2017

Claire Smith

Claire Smith

Investment Director

Infrastructure is all around us, whether it is the road we drive along, the school we send our children to or the electricity we use to run our homes or businesses. By definition, infrastructure is often essential, difficult to replicate and has monopoly-like characteristics.

This can make investment in the financing of infrastructure projects very attractive to long-term investors. In particular, these types of investment have become more popular with institutional investors.  They can offer secure cashflows that are less sensitive to the wider economy, and therefore less correlated to traditional asset classes, such as corporate bonds and equities. This characteristic has become even more compelling as investors anticipate rising interest rates.

 Infrastructure assets are financed through a mixture of equity and debt. Debt is usually the predominant part of financing (around 75%). Infrastructure debt - specifically private debt - has a number of benefits that have proved attractive to investors. It has provided superior yields, credit diversification and the potential for longer duration. Their “monopolistic” characteristics and physical nature also means infrastructure debt investments often offer greater security for lenders than traditional corporate loans or bonds.

Protection for lenders is further enhanced by comprehensive risk monitoring. If certain key indicators suggest that a project is facing difficulties in repaying its debt, borrowers are able to trigger certain rights. They can, for instance, halt further withdrawals from reserve accounts, bar further borrowing, or cease paying dividends. The strength of these lender protections is demonstrated by the very small percentage of infrastructure projects that default on their loans1.

Of the small proportion of loans that do default, the outcomes are mostly good. In over 60% of cases lenders have recovered 100% of their loan[1], although there is no guarantee this would be the case in the future. Low levels of default combined with high recovery rates mean that overall expected losses have been low.  Comparing the 10 year expected loss of infrastructure debt versus corporate bonds of various credit ratings, infrastructure debt has a lower expected loss than A-rated corporate bonds. 


[1] Moody’s “Default and Recovery Rates for Project Finance Bank Loans, 1983-2015”