Die Widerstandsfähigkeit von Infrastrukturanleihen liegt in ihrer DNA


As 2020 began, the biggest dilemma most investors faced was whether a decade-old bull market could keep running into the headwind of the US-China trade war.

However, the spread of coronavirus (Covid-19) around the world has snapped investor attention sharply from assessing return potential to gauging potential losses. Central banks have reverted to “global financial crisis mode”. The Federal Reserve, the European Central Bank and the Bank of Japan, to name a few, have announced measures to shore up markets, with bond markets again a focus of support.

Infrastructure debt has a long history of resilience when compared with corporate bond markets. But with assets of all kinds arguably facing the most challenging conditions in a generation, investors may wonder if infrastructure debt’s stability will be tested.

It is a fair question. However, while infrastructure debt may be exposed to many of the same risks - and have similar default qualities - to corporate debt in the short-term, recovery rates have been far better over the long-term. Exposure to economic or commercial cycles is lower. This is because some risk profiles – while similar on the surface - carry very different implications on closer inspection.

Not all risks are created equal

Major construction projects present significant and sometimes undetectable investment risks, however they are financed. Developers, experts and construction companies cannot plan for every eventuality when variables as capricious as the weather are involved. Administrative delays, archaeological excavations, the failure of subcontractors all litter the history of the construction industry and cause – at best – delays. At worst, they can cause bankruptcies.

The security packages put in place in the “Juncker Plan” will not change anything. They improve recovery in the event of default, but not the risk of default itself. The financing of companies that manage existing public services is and will always remain less risky than the financing of new infrastructure: their past performance is observable, their business model is established, and investments in general are more limited.

That said, credit risk is demonstrably profoundly different between infrastructure debt and corporate debt.

As illustrated in the table below, infrastructure financing is much more resilient. The probability of recovery in the event of default is nearly twice as high as that of financing from companies with equivalent ratings.

Average credit loss for BBB rated debt according to Moody’s

               

After 1 year

After 10 years

Infrastructure debt

0.07%

1.13%

Corporate debt

0.07%

1.94%

Source: Moody's "Infrastructure Default and Recovery Rates, 1983 - 2018"

Why is infrastructure more resilient?

1. We need infrastructure

The intrinsic characteristics of infrastructure financing explain this greater resilience. Infrastructure finance is used to meet basic needs of a population and an economy. Infrastructure generally operates in a situation of legal monopoly or limited competition. Assets have a real social value and not a financial-only value that can force the stakeholders to show some mutual benevolence in the event of default.

2. Restructuring means greater flexibility

Infrastructure restructuring processes generally focus on the financial structure. They usually result in maturity extensions ("slow pay" versus "not pay" situations). During the previous financial crisis, several infrastructure companies (photovoltaic parks, port operators, motorway operators...) saw their repayment profile optimised, debts were almost 100% recovered and the companies returned to performance after a few years of low levels.

In short, you don't turn off the water tap because the distributor is insolvent. SAUR, France's number 3 in water and sanitation management, is a good example of successful financial restructuring. It was very heavily affected by a price war and unable to meet its deadlines. But its financial structure was completely overhauled in 2013 with the agreement of its creditors, which enabled it to regain most of its value when a new reference shareholder joined the company five years later.

3. Little risk of technological obsolescence

Even when compared with generalist private debt infrastructure can compare positively. Generalist private finance is not necessarily more fragile, but is often exposed to shorter economic and commercial cycles. As a result, this type of private debt can be subject to profound market downturns.

Investors may remember the Palm Pilot and Kodak - at one point industrial flagships. But both were ravaged by the phenomenon now termed “uberization”, that is to say, their relevance was bypassed. There is no such thing in infrastructure. There will always be a need for roads for cars, whether they are powered by gasoline or electricity. There will always be a need for electrical grids to power homes, whether they carry green electricity or are produced by coal-fired power plants.

Familiarity can mask complexity

These reassuring statistics do not absolve investors from a high degree of selectivity in their investment process. Infrastructure as an asset class can sound familiar, but that can mask its complexity.

It requires an expert manager that understands client needs and how to avoid stressful default situations that can prompt volatility in values and performance. Extensive experience in the management of private debt restructurings will enable you to anticipate these perilous situations, ensure that the financial documentation allows it to be managed advantageously, and help avoid traps.


Die hierin geäußerten Ansichten und Meinungen stammen von dem Autor und stellen nicht notwendigerweise die in anderen Mitteilungen, Strategien oder Fonds von Schroders oder anderen Marktteilnehmern ausgedrückten oder aufgeführten Ansichten dar. Diese können sich ändern.