Infrastructure

Understanding infrastructure debt

By Andrew R. Jones
BA (Economics) Global Head of Infrastructure Debt Sydney, Australia

In a low interest rate environment, with little sign of change at least in the short-to-medium term, finding an asset class that delivers yield and security is no easy feat.
One sector that has become more compelling in recent years is infrastructure debt, particularly for institutional investors looking for long-dated products, with quality cashflows and genuine defensive characteristics.

While infrastructure debt has been around for decades, it has relatively few, large players, at least in the subordinated market. And, as the table below illustrates, we believe it has a good track record in terms of returns and defaults.

 Asset Class  Return (per cent)
 Infrastructure Debt (Mezzanine)1  8-10
Infrastructure Debt (senior)23=6 3-6
Global bonds2 2-3
Global high yield credit2 4-5
Global equities2 6-7
Global listed infrastructure2 5-6

Infrastructure debt is a defensive or stable asset class with the potential to boost yields relative to other assets. It sits between senior debt and equity in the capital structure, and as a result, commands a higher yield than senior debt. Default risk is always a consideration, although historically the infrastructure sector has had relatively low default rates in part due to stable cash flows.

A secured infrastructure debt opportunity will typically have very detailed comprehensive financial covenants, negative and positive undertakings by the borrower and a comprehensive security structure which includes fixed and floating charges over all the assets of the company we are lending to.

Characteristic Infrastructure Debt
Security Typically secured against specific assets
Long-term contracted cash flows Yes
Regulated environments Yes
Barriers to entry High
Inflation linked Yes
Correlation with traditional asset classes Low
Asset/liability matching profile High

AMP Capital is among the larger infrastructure debt providers in the market. It provides capital for acquisitions, refinancing and serves as an alternative to owners exiting a business.

According to Willis Towers Watson, AMP Capital sits in the top 15 infrastructure managers globally with $US16 billion in infrastructure equity and debt funds under management and is the fifth largest infrastructure debt manager globally according to Infrastructure Investor magazine.

We’ve had a belief for some time that there are attractive returns in the subordinated space and at various points in the economic cycle, infrastructure debt can look attractive relative to infrastructure equity.

We believe we are at one of those points now because the amount of capital available for equity infrastructure has pushed prices up and there are very few managers out there such as AMP Capital that are willing (or able) to provide $200, $300 or $400 million in infrastructure debt.

 

1 Gross IRR of AMP Capital Infrastructure Debt Funds
2 All other returns are based on AMP Capital’s Market Medium Term Assumptions as at November 2018. Past performance is not an indicator of future performance.
 

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Important notes

While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) (AMP Capital) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.
This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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