South Korea: the end of the infra spree?

Korean insurers are making changes as they see diminishing returns from infrastructure debt.

Three insurers from South Korea told PDI sister title Infrastructure Investor’s Seoul Summit on 7 May that the country’s institutions are facing a particularly tough time as they suffer diminishing returns from infrastructure loans.

LPs around the world are struggling with long-term investment mandates amid an ever-changing global investment environment. Yet executives we spoke to at the summit, including DGB Life Insurance’s chief investment officer Byung Kyu Cheon, still view infrastructure debt as a better risk-adjusted alternative to traditional fixed-income investment products.

One panellist said institutional investors want a consistent stream of cashflows that match their long-term investment durations, and which have satisfactory risk-adjusted return profiles.

Korean insurers have maintained a keen interest in infrastructure debt, notwithstanding the continuing low-yield environment.

Jason Hyunjae Kim, head of one of the infrastructure teams at Samsung Fire & Marine Insurance, told PDI: “PPP-type projects are preferred [among Korean investors]. But senior loans from these are only yielding two percent in Europe. That is not enough [for us] to go into that market.”

Some investors are willing to move to a riskier capital structure. Cheon said that this was an emerging phenomenon among LPs because of the lack of opportunity to source deals and the increased competition among GPs.

Whether investors will make the switch will depend on whether they have enough risk appetite to invest further down the capital structure in areas such as mezzanine. It will also depend on whether investors feel comfortable using leverage on a deal or fund level – considering that risk capital is subject to more stringent adequacy guidelines, as PDI first reported in 2017.

Si Wan Lee, head of project finance at Samsung Life Insurance, said his team was trying to invest in equity and mezzanine. Although it previously had significant exposure to infrastructure equity, Lee said it was now looking at the asset class with a view to gaining a cashflow component.

According to Lee, some infrastructure debt fund managers choose to source higher-yielding deals from less familiar countries or by putting more leverage on their fund structures. “We have a strong [investment] guideline which includes sovereign ratings of BBB and above for the infrastructure asset class,” he said. “We can venture into Latin America and other exotic countries … like Mexico, Peru, or Chile. It is tough due to our internal credit team’s concerns [on investing in these countries].”

Commitments have largely been shifted towards mezzanine debt and equity, according to the three panellists from the Korean insurance firms. Little attention has been given to availability-based PPP project loans and senior secured loan funds with return profiles of LIBOR plus 250 basis points.