A new Wind is blowing through Infrastructure Debt

News - 4/12/2017

Investors are increasingly turning to infrastructure debt, a strong option among alternative asset classes in recent years. Recent political developments in the US and Europe have boosted its attractiveness.
Donald Trump has made infrastructure spending a national priority



 

 

Donald Trump has made infrastructure spending a national priority. He has drawn up a list of 50 projects for a total of USD 138bn (EUR 130bn) with 50% funded by the private sector. Last year, the US remained the biggest project financing market in the world with 236 deals for USD 79bn (EUR 75bn). The most active segments were conventional energy (57%), renewable energy (22%) and transport (16%).

The UK is one of the biggest markets in Europe and represented around 30% of the zone’s total infrastructure investments with EUR 46bn. The UK has a  few advantages in spite of the uncertainty over its economic future following the referendum in favour of Brexit. For example, the Chancellor, Phillip Hammond, says the government is to increase infrastructure investments, including an extra GBP 1.1bn (EUR 1.3bn) for local roads and 450m (EUR 530m) for railways over the next 5 years.

Almost endless opportunities

There are an impressive number of investment opportunities throughout the world. Since 2010, approximately EUR 300bn has been spent on infrastructure projects each year with around 70% of that financed by debt. And opportunities are not expected to dry up in coming decades. France is an attractive destination for investors as it benefits from a reasonably stable legal and political environment. The country saw 102 projects in 2016 for a total of EUR 13bn, essentially in transport (44%) and renewable energy (28%). Last year, Spain spent EUR 15bn on 81 infrastructure projects. The main areas were transport (37%), conventional energy (29%) and renewable energy (23%). Demand for brownfield projects is still high.

 
solar panels

 

In the same year, a total of EUR 9bn was spent in Germany across 44 deals. The top sectors were renewable energy (36% in value), transport (30%) and the environment (17%). The government’s recourse to public private partnerships or PPP is a positive factor and the country has earmarked a considerable number of transport and social infrastructure needs. Germany is the world’s second largest market for offshore wind power with 6 deals in 2016.

Italy completed 67 deals for EUR 9bn in 2016, a record performance for the country. The share of renewable energy projects is getting bigger and bigger (34% in 2016) with international investors playing an increasingly significant part and strong government support. Italy is the third biggest market for solar energy with 29 deals in 2016.

The regulatory framework has changed the game

Regulatory authorities have turned favourable on infrastructure debt in recent months. The introduction of French-regulated fonds de prêt à l'économie (funds of loans to the economy) and broader access to the infrastructure universe are a sign that regulators are keen to help institutionals invest. For insurance company investments, Solvency II’s treatment of SCR is increasingly attractive. The European Commission has eased eligibility for infrastructure assets, allowing insurance groups to benefit from very attractive SCR conditions (better than for BBB-rated assets, for example). The Commission’s changes were also motivated by its Investment Plan for Europe (November 2014), the so-called Junker Plan, which seeks to attract at least EUR 315bn in infrastructure investments by the end of 2017.

Investing in infrastructure debt helps meet colossal needs



 

 

Investing in infrastructure debt helps meet colossal needs in transport, energy and telecoms. And by funding new green-field projects and reconstruction and renovation through brown-field programmes, it also helps drive the real economy while furthering sustainable development at the social, economic and environmental levels.

Due to significant economies of scale, many infrastructure assets are difficult to reproduce and are often regulated by frameworks with little or no competition. These natural monopolies have strong barriers to entry and their yields are less impacted by rivals. All this makes infrastructure debt an attractive, low-risk asset. Add in attractive credit spreads, and it is easy to see why institutionals find the asset class so attractive.

Data for 2016 were sourced in the InfraDeals FY16 Project Finance League Table Report.
1. Existing infrastructure.
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