IN FOCUS6-8 min read

Latest trends in infrastructure debt markets

The competitive pressure on the infrastructure debt market across the board was expected to carry on during 2020 but the unprecedented Covid-19 crisis seems to have halted this trend. We discuss the 2020 trends that we are already seeing in the markets.

17/04/2020
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Read full reportSchroders-Latest-trends-infrastructure-debt-markets
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Authors

Emmanuel Faucquez
Senior Fund Manager, Infrastructure Debt
Jérôme Neyroud
Head of Infrastructure Debt, Schroders Capital

The long-term trend of spread compression which started in 2013 has continued in 2019. Sought-after sectors such as renewables and regulated assets continued to attract investors which drove pricing even lower while PPP transactions (which have long been very low priced given their underlying risk profile) seem to have reached the bottom.

This tighter pricing trend was primarily the result of a large increase in the number of actors active in the infrastructure debt space, attracting significant liquidity from usual suspects like banks and multilaterals (EIB and ECAs) as well as new players, namely institutional investors.

Institutional investors encompass natural Euro investors but also overseas deep pocketed investors (e.g. large US insurance companies) which entered the European market to seize new opportunities not available in their home market.

Beyond the attractiveness of a flourishing infrastructure market, such investors benefited from relatively favourable cross currency basis swap spreads. Financial advisers and Sponsors quickly learned how to best use this new US Private Placement capacity and these players set up dedicated teams in Europe. In addition to US investors, Japanese and Korean investors have also been addressing the market with very competitive pricing, large capacity and a bias towards ‘boiler plate’ no brainer assets (e.g. regulated assets and PPPs). Such non-domestic pools of capital flew ‘en masse’ into such safer assets, thereby loosening
terms and structures, and ultimately negatively affecting the relative value of these somewhat ‘safer assets’. By 2019, regulated assets financed by a pool comprised exclusively of non-domestic lenders - prepared to accept aggressively geared, low priced debt structures - was not uncommon.

In a more and more segmented market, some institutional investors also decided to enter the nascent market of mezzanine and subordinated debt transactions. This competitive pressure on the infrastructure debt market across the board was expected to carry on during 2020 but the unprecedented Covid-19 crisis seems to have halted this trend.

Read more in our paper below.

Read full reportSchroders-Latest-trends-infrastructure-debt-markets
0 pages273 KB

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Authors

Emmanuel Faucquez
Senior Fund Manager, Infrastructure Debt
Jérôme Neyroud
Head of Infrastructure Debt, Schroders Capital

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