07 / 10 / 22 - 2 minute read
Bright spots for investors in today’s markets are few and far between. Between inflation, increases in the cost-of-living, rising interest rates and overall negative sentiment, markets have dived. While much attention has been on equities, the bond mar
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Many borrowers in infrastructure tend to have long-duration inflation-linked cashflows and long-term borrowing in place, meaning they should see revenues grow even in difficult markets, while possessing significantly lower levels of refinancing risk compared to borrowers in other sectors. By focusing on these characteristics, since 2000, PATRIZIA has generated an 8.5% return* without any defaults or credit losses.
Infrastructure borrowers are unusually well-positioned if the looming prospect of a recession comes to fruition, as they have taken the opportunity to raise long-term debt while interest rates were low. Meanwhile, investors benefit from this stability, and those who have secured floating rate investing will continue to see a highly attractive returns – all of PATRIZIA’s debt investments are floating rate.
And even as the negative sentiment stings the market, opportunities for future investment will remain for nimble investors that know where to look.
We have seen many borrowers originally destined for the public market now looking for private investors. Borrowers face more structured transactions and pricing may still be higher, but deals are still being done.
However, all this is not to say there have not been changes to the market given the current environment. In light of challenging public markets, borrowers have faced markets that are either closed or seen prices spike and must search for other avenues of financing.
As a result, we have seen many borrowers originally destined for the public market now looking for private investors. Borrowers face more structured transactions and pricing may still be higher, but deals are still being done.
There has been upward pressure on spreads across the board. New deals in infrastructure spreads and margins can be c.50 basis points wider than in January 2022.
However, not all lenders have the means or appetite to deploy capital in this environment, so we also anticipate a reduction in liquidity. This should reduce competition, leading to a strong pipeline for investors with discretionary capital to put to work.
Declining liquidity has already brought some sectors, such as renewables, back into focus. It has been difficult to find good relative value within the renewables sector over the past few years, given the enormous amount of money that has been chasing deals in that space. However, better-priced transactions that are more conservatively structured are starting to emerge.
Another benefit for the sector is the premia for high-yield infrastructure debt should remain attractive compared to investment-grade senior debt, given the higher levels of liquidity that will remain in the senior market.
There should also be little difference in credit losses between senior and junior debt, even in a recessionary environment, given the strong fundamentals of the borrowers.
That being said, now is not the time for too much risk. We are focussing our origination on traditional infrastructure business risk profiles and capital structures that offer clear inflation protection and low levels of refinancing risk.
This means increasing exposure to core infrastructure assets supported by regulation, long-dated contracts or monopolistic positions, such as utilities or communications infrastructure.
Overall, the turbulent, challenging market environment is not to be underestimated. Managers need to use their experience and sound risk management to ensure their investors benefit from all that infrastructure debt has to offer.
* Past Performance is not indicative of future results.