It’s inevitable that, even with a pandemic as tragic as covid-19, we will find ourselves in a situation where relative ‘winners’ and ‘losers’ emerge.
For example, it’s become evident that airports – immediately and devastatingly impacted, their future painfully uncertain – have emerged as one of the big ‘losers’ of covid-19. Things look better for toll roads, but only if you manage a corridor deriving a significant portion of its revenues from freight traffic. Managed-lane projects dependent on congestion are obviously faring much worse.
On the ‘winner’ side of the equation, we obviously have digital infrastructure, its status as essential infrastructure effectively confirmed as millions hunkered down to work remotely. Renewable energy – notwithstanding important questions about bankability as power demand plunges – is also seemingly acquitting itself well.
But what about private infrastructure debt? In late May, we wrote covid-19 was the asset class’s first acid test. That still stands, but is it plausible that private infrastructure debt will emerge as one of the ‘winners’ of the pandemic?
Early signs are encouraging, although most of them are, inevitably, anecdotal at this stage. In a recent article, Andrew Jones, global head of infrastructure debt at AMP Capital, was bullish on the asset class’s prospects.
“The resilience of this relatively young asset class has just been tested in its first global crisis,” Jones wrote. “We are pleased that the essential nature of the robust businesses we lend to and our carefully-negotiated covenants have meant that no loans in our portfolio have needed to be renegotiated, while some sectors – including digital infrastructure, a focus for us – are performing very strongly.”
It’s also telling that, as reported in The Pipeline, even lenders with significant exposure to hard-hit sectors like airports are expecting to get their money back, although our source was less positive on equity’s ability to recover its pre-pandemic value.
And as evidenced by Macquarie Infrastructure Debt Investment Solutions‘ latest £2.7 billion ($3.4 billion; €3 billion) fundraise for UK infrastructure, the asset class is maintaining its ability to attract ever-larger amounts of money from investors.
If, as Blackstone’s Stephen Schwarzman said during the Bloomberg Invest Global virtual conference, we’ll “see a big V in terms of the economy going up for the next few months because it’s been closed” and the worst of the virus is behind us, then we might find ourselves in a situation where Jones is right and most private infrastructure debt portfolios will find themselves relatively unscathed.
Were that to happen, infrastructure debt’s fundamental characteristics – its low default rates, its greater safety vis-à-vis equity and its attractive risk-return profile – would be underlined, perhaps making investors think harder on how they want to access infrastructure as an asset class.
Of course, we’re potentially in the early stages of the pandemic and events might not play out as Schwarzman suggests. The need for future large-scale lockdowns, for example, and the economic devastation that would bring, would almost certainly spell trouble for private infrastructure debt.
In that kind of aggravated scenario, the words of Mark Wells, MUFG’s head of structured debt capital markets, EMEA, come to mind: “Infrastructure debt funds have grown quite dramatically over the past five years. Some funds have taken on significant amounts of debt with relatively small teams. With certain sectors now coming under stress, potential covenant breaches and defaults are undoubtedly going to put the pressure on human capital.”
That might drag the likes of AMP’s Jones to the negotiating table at a later stage and test the ability of private debt funds’ teams, which are generally smaller than banks’.
If they were able to cope even in that worst-case scenario, then the asset class’s future is all but assured. For the time being, Round I seems to be going reasonably well.
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This article was first published by our sister title, Infrastructure Investor (www.infrastructureinvestor.com).