The investment strategy of Schroders’ infrastructure debt offering is focused on the brownfield sector of the market, investing predominantly in junior debt.
Junior debt displays quite different characteristics to the senior part of the infrastructure market in terms of size of opportunity, market participants, prepayment protection and risk profile.
Notably the tenor for senior and junior debt are also generally quite different: senior debt is often longer in tenor and better suited to investors looking for duration, while the junior debt part of the market tends to be shorter in term and more suited to investors who want to capture an illiquidity premium, however over a shorter time frame.
The term “brownfield” is used in connection with infrastructure firms that already have an operational track record (e.g. an existing airport) – the project is already constructed.
The Schroders Infrastructure Finance Team has a particular emphasis on “brownfield” financing, thereby avoiding significant construction risks. This segment, which at present is less saturated than the greenfield segment, is often less risky, and it also enables capital to be invested more quickly.
UK-based infrastructure projects /companies (GBP denominated debt)
Junior and senior debt with a main focus on junior secured
100% brownfield and core assets
Tenor: 2-10 years and target WAL of 5-6 years
BB rating equivalent debts
Fixed and floating rate
Investing at a junior level in the capital structure
No leverage at fund level
Interest rate risk for fixed-rate instruments: Interest rate volatility may reduce the performance of fixed-rate instruments. A rise in interest rates generally causes prices of fixed-rate instruments to fall.
Deterioration of the credit quality of the bond: Caused by a change in the market environment (for commercial activities) or a change in law/regulation (for all infrastructure activities).
Risk of issuer default: A decline in the financial health of an issuer can cause the value of its bonds to fall or become worthless.
Prepayment risk: The capital may be repaid by the borrower before reaching maturity.
Exchange rate risk: Where assets are denominated in a currency different to that of the investor, changes in exchange rates may affect the value of the investments.
Illiquid and long term investment risk: Due to the illiquid nature of the underlying investments, an investor may not be able to realise the invested capital before the end of the contractual arrangement (which is likely to be long term). If the investment vehicle is required to liquidate parts of its portfolio for any reason, including in response to changes in economic conditions, the investment vehicle may not be able to sell any portion of its portfolio on favourable terms or at all.
Capital loss: The capital is not guaranteed and investors may suffer substantial or total losses of capital.
Trade cancellation risk: Trades and settlements are made on a bilateral, negotiated basis. A last-minute trade cancellation can occur in the absence of standard trade and settlement processes via clearing houses.
Service provider risk: Investments can be at risk due to operational and administrative errors, or the bankruptcy of service providers.