For professional investors or advisers only
Schroders
Infrastructure Finance
Monthly Newsletter – April 2016
The long view
Graph of the month – EMEA infrastructure source of financing
Disintermediation has just started in Europe and is still an emerging trend in infrastructure funding. It is
driven by borrowers looking for alternative source of financing to mitigate the refinancing risk resulting
from volatility of debt capital markets and banking cycles, and by institutional investors attracted by
long dated debt investments. But the bulk of infrastructure financing remains dominated by banks,
meaning that most of infrastructure debt currently accessible to institutional investors is short dated
(6–7 years on average for brownfield financing).
2015
Charles Dupont
Head of Infrastructure Finance
2014
2013
2012
2011
2010
0%
10%
20%
30%
40%
Equity
Infrastructure debt is a
“new” asset class for
a number of investors,
and as such raises a
number of questions and
potential misconceptions.
This monthly note aims
to provide insights and
clarity on this promising
investment proposal,
from structural trends
shaping the asset class
to market activity updates
and specific sector
considerations.
50%
Bank Debt
60%
70%
80%
90%
100%
Capital Market Finance
Source: InfraDeals, February 2016.
While infrastructure debt is often associated with greenfield and with long dated fixed rate financing
instruments, we see more opportunities in the shorter dated segment of the market, and in a wider
range of risk profiles, which could also meet investors needs in terms of yield and contribute to
credit diversification.
Qualifying infrastructure debt
Chinese menu
Institutional investors can view this wide credit universe as diversifying corporate credit allocation
with high quality debt instruments generating superior returns. Infrastructure debt is complex, highly
heterogeneous as shown in the typology below and not very liquid, but investors can get paid for that
complexity and liquidity. Key considerations to address before investing are: access to deal flow, building
a deep expertise in the sector for risk assessment and management, and reaching critical scale.
Nature
Sectors
Geography
Business
Greenfield
Transport
West
Europe
Availability
Brownfield
Power
South
Europe
Utilities
Maturity
Seniority
Currency
Rate
>A -
20Y+
Senior
EUR
Fixed
Contracted
BBB/BBB+
10Y– 20Y
Subordinated
GBP
Floating
CEE
Concession
BBB -
7Y – 15Y
HoldCo
USD
Linker
Telecom
UK
Regulated
BB+/BB
<7Y
Social
OECD
Merchant
NR
Emerging
Source: Schroders, for illustrative purposes only.
Rating
AUD
Other
Infrastructure Finance
Infrastructure Finance
Market trends
Political support to energy transition – a tailwind
In 2015, 563 deals closed in Europe with a value of USD156.06bn, including USD84bn via bank debt
and USD9.36bn via capital markets1. In the current market environment with a relatively flat spread
curve and increasing interest rate risk in the long term, we believe that the acquisition of bank loans
by institutional investors, being structured as floating rates and short dated, may offer an attractive
relative value to other loans and corporate credit.
After a very slow start in 2016, the EUR IG corporate primary market gained momentum towards
the end of the quarter. Markets have regained their risk appetite following action by central banks,
a firming in commodity prices and evidence that the tail risks of a US recession and of a China hard
landing are not materialising.
The infrastructure (private) debt market has remained active throughout the period. A number of
landmark deals have been announced: acquisition financing for London City Airport, the Belwind
offshore windfarm refinancing in Belgium by banks and institutional investors, or the Caruna
distribution network in Finland through a private placement process. The energy sector should
continue to offer a number of investment opportunities in Europe, thanks to the strong political
support to the energy transition.
In brief
Sector updates – risks and rewards are not created equal
–– Renewables: Last year for the first time, renewables accounted for a majority of new electricitygenerated capacity added around the world, according to a recent United Nations report2 (53%
of the 253GW added, vs. 16% for coal). Adapting, upgrading, interconnecting transportation and
distribution networks and R&D on energy storage are critical throughout developed to emerging
markets, to adapt power systems to the changing energy mix. An interesting investment theme.
–– US toll roads: Texas lawmakers explore ending toll roads in the background of the bankruptcy of the
SH130 section3. The US has rarely explored the private funding option for transportation, compared
to Europe. It seems like the few attempts have not been compelling and a number of politicians are
now requesting the nationalisation of these toll road companies, with a similar claim as is often heard
in Europe that toll roads are “privatising profits, but nationalising losses”. Political risk.
–– Gas: ConocoPhillips is said to be planning the closure of the Lincolnshire gas pipeline, which is
amongst the 15 big gas networks in the UK section of the North Sea, and the Theddlethorpe gas
terminal4. At least 10 oil fields are said to be dependent on this pipeline, a number of them are having
ceased production in the context of falling oil prices. Industrial equipment vs. infrastructure asset.
–– Water: the abolition of water charges in Ireland has entered the political debate in the context
of forming a new government5. The charge has been introduced two years ago to comply with
European law policy. Reversely in the UK, the regulation applicable to water companies has been
further anchored last year for a 6th period of 5 years, giving always more visibility to investors
on authorised cost of capital, operational and capital expenditure allowances (totex), allowed
outperformance and incentive regime, taxation and asset depreciation levels. Local is crucial.
Source: 1 InfraDeals 2015 Trend report, 2 Global trends in Renewable Investment 2016, UNEP, 3 wfaa.com, 31/04/2016,
4 ibtimes.co.uk, 29/03/2016, thetimes.co.uk 29/03/2016, 5 Irish independent 1/03/2016.
Important Information: This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended
as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice,
or investment recommendations. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. No responsibility can be accepted
for errors of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past
performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get back the amount originally
invested. Schroders has expressed its own views in this document and these may change. Issued by Schroder Investment Management Limited, 31, Gresham Street, EC2V
7QA, who is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. Infrastructure debt is exposed to
the following risk factors: illiquidity risk, interest rates risk, default risk, early reimbursement risk. w48791