Throughout our 200 year history, Schroders has participated in financing numerous infrastructure projects across Europe, the United States and Asia, ranging from railway lines, public transport and energy infrastructure to the distribution of drinking water.
Today, Schroders offers dedicated expertise in infrastructure investing to its institutional clients, with a specialised and experienced team.
A diversification solution for your bond portfolio
With bond yields falling ever lower, prompting investors to seek other low-risk sources of return, infrastructure debt represents a welcome diversification opportunity for a traditional bond portfolio.
The diversification aspect stems from the very nature of infrastructure assets. As essential assets in local communities, they offer:
- a long economic life
- low elasticity of demand
- stable and predictable cash flow streams
Infrastructure debt can also help reduce the volatility of a credit portfolio. A Moody’s research report on default and recovery rates1 has highlighted two specific advantages of this asset class:
- a better recovery rate than traditional corporate bonds (by around 30%)
- lower ratings volatility
Moreover, the low volatility and diversification opportunities offered by these investments were the reason for regulators’ favourable treatment of infrastructure assets under Solvency II.
The infrastructure debt sector is complex and illiquid, but as a result, it can be highly remunerative for investors. It is intended for investors able to implement a medium- or long-term (from 5-7 years to 20+ years) buy and hold strategy.
1 'Infrastructure default and recovery rates, 1983-2014', Moody’s Investor Service, 15 March 2016.
In 2015, Schroders put together an experienced team specialising in infrastructure assets in order to offer this expertise to its institutional clients; especially insurers and pension funds.
The team has worked together for a number of years, building proven expertise in originating, structuring and managing more than EUR 3 billion in infrastructure investments on behalf of institutional investors.
They acquired experience in leading firms with an infrastructure specialism, such as AXA IM, AXA France, BNP Paribas, Dexia, Société Générale, Natixis and Bouygues.
The team is integrated into Schroders’ global fixed income platform and has access to all the support functions (economics research, legal advisers, compliance specialists, risk management) of a group that manages over EUR 433 billion of assets worldwide.
The team analyses around 300 opportunities every year and selects 20-30 transactions. Since December 2015, it has invested more than EUR 875 million on behalf of institutional investors.
Source: Schroders, as at 30/09/2016.
Infrastructure debt products range from bank loans to publicly listed bonds, the latter being accessible via traditional fixed income strategies.
Source: Schroders’ estimates based on Bloomberg, Infranews, JP Morgan and DB data for May 2016. The term “brownfield” is used in connection with infrastructure firms that already have an operational track record (e.g. an existing airport); the term “greenfield” refers to infrastructure projects under construction (e.g. a new hospital).
The team specialises in loans and transactions involving securities issued through private placement, with a particular emphasis on “brownfield” financing, thereby avoiding significant construction risks.
For this heterogeneous asset class, which requires special expertise, our team’s approach is based on three key factors:
Access to deal flow – the private debt market requires in-depth knowledge of the sector and an extensive network of contacts.
Investment expertise and the negotiating skills needed for complex transactions.
The capacity to invest the capital raised in a short timeframe, thanks to privileged access to transactions. Our team has an unrivalled record in this area.
Infrastructure debt key risk factors
Illiquidity risk: the debt and debt securities acquired are not liquid and cannot be sold at any time without the risk of incurring losses (or it may not be possible to sell them). This investment strategy is therefore intended specifically for buy-and-hold investors.
Interest rate risk: the valuation of fixed rate investments depends on the level of interest rates.
Default risk or the risk of an issuer rating downgrade: although Moody’s has shown that the probability of an issuer default in the infrastructure sector is significantly lower than in other sectors, the issuers – which are firms operating in a specific market – may not be able to meet their debt repayments. The financing agreements contain a number of protections, for example, financial covenants are used to monitor the financial strength of an issuer, and can help to anticipate or resolve any difficulties.
Prepayment risk: the issuer may repay the capital before the contractual deadline. This risk can be mitigated through the imposition of early repayment penalties (make-whole or non-call provisions).