BNP Paribas AM has made its first move into infrastructure junior debt following a partnership with Korea Investment & Securities worth up to €2 billion.

The move will see BNP source and execute transactions on behalf of KIS over the next two to three years, focusing on junior debt transactions in Western Europe. The partnership has already made its first investment, subscribing to a £150 million ($197.3 million; €174.4 million) private placement to Heathrow Finance, holding company of the UK’s Heathrow Airport.

A dual strategy will be employed by KIS for the BNP partnership, according to its energy and infrastructure head avid Guhn-Chang. Low yield and low risk debt will be entirely be passed on to Korean investors; mostly for insurance companies. High yield and high risk debt shall be kept by KIS’s own balance sheet on a buy & hold basis.The strategy is targeting returns of about 5 percent.

As PDI’s sister title Infrastructure Investor reported, KIS was both a debt and equity underwriter in September for the first transaction for Renewable Energy Income Partnership II, a UK-focused renewable energy fund established by Octopus Group.

KIS chose the debt strategy partly because it “does not believe current valuations is at a sustainable level,” Guhn-Chang told Infrastructure Investor.

“KIS does acquire infrastructure equity assets, but only at the reasonable price. Instead of chasing the market valuation, KIS has opened the sub-debt business with BNP in order to have direct access to the trophy asset in the market; such as Heathrow,” he said.

The expansion into junior debt is the “natural next step” in BNP’s strategy, Karen Azoulay, head of infrastructure debt at the group, told Infrastructure Investor. BNP launched its first senior infrastructure debt fund in 2017 and Azoulay added that a junior debt fund could be launched in the near future, although it remains focused on investing with KIS for now.

BNP’s senior debt fund does not invest in the UK due to short-term currency concerns, although Azoulay explained that KIS does not have the same currency restrictions.

BNP said the managed account solution provided is befitting of the requirements of a large global investor such as KIS.  At Infrastructure Investor’s recent infrastructure debt roundtable, Emma Haight-Cheng, partner of infrastructure debt at AMP Capital, said “for investors with upwards of about $500 million, they may want more control and so would look to bespoke managers to provide bespoke solutions”.

Additional reporting by Eduard Fernandez

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