The top 3 myths on infrastructure debt
There are various opportunities for infrastructure funding. However, some aspects of the asset section remain understood poorly. The financial crises globally have changed the fundamental way in which infrastructure projects were funded. Governments have spent less and new regulatory restrictions have limited bank lending. This hence has created ample number of opportunities for institutional investors to fill in the funding gap by extending private loans directly to infrastructure borrowers.
Investors however, still carry many misconceptions regarding the characteristics of infrastructure lending market. Here we bust the three common myths.
It is untested asset class and chasing higher yields bring high rewards
Investors' interest is intense in infrastructure debt and appears to be new, but there has been private participation in the asset class for quite some time now. This is capable of inspiring confidence among investors who consider making a move into the infrastructure debt. Even the cursory look at infrastructure debt show wide range of underlying activity and a broad risk spectrum. Higher yields do come with higher risks and hence takes effective research to sort diverse asset class that encompasses prisons, airports and hospitals.
Principal economic infrastructure assets share various key attributes. They are long life physical assets and support economic growth by delivering essential services and facilities that are rather difficult to replace. High barriers generally provide asset providers monopolies. Assets as a result offer secure long term revenue regulated by concession agreements that are long term. Investing in asset that lacks core infrastructure features may bring increased yield into range. However, investors may fail to secure predictable cash flows that attract them to asset class.
Infrastructure debt investments tie money for a long period
Misconceptions regarding infrastructure debt time horizons date back to days when bank led project finance had an upper hand over infra-structure lending. Investing was a long term proposition wherein assets were being valued based on a 30 year plus cash flow model. Things however are different today. Extending originated private loans imply long term frames. But, lending to existing 'brownfield' assets that call to be improved, expanded or repaired demand less patience. The assets are running and already producing revenues so that they can deliver cash yields immediately.
Infrastructure debt don't hold up when interest rates move high
Infrastructure debt has always attracted more attention in the 'lower for longer' interest rate backdrop that prevailed ever since the global financial crisis. Loans offer striking yield pickup over ultra-low government bond yields. Predictable, stable nature of infrastructure debt cash flow provides welcome diversification from vitality of high yielding corporate bond.This however does not suggest that infrastructure debt will not hold up as interest rate cycle turns upward and inflation pressure resurfaces. As infrastructure loans can be floating rate, they offer good hedge against rising interest rate and high inflation.
These are some common myths on infrastructure debt. However, when private capital start assuming great roles in infrastructural debt asset, the turnover of assets look set to increase and this broadens investable universe further.