PI Partnership


EUROPEAN INFRA DEBT: AN INVESTMENT FOR THE POST-COVID ERA


Karen Azoulay is head of infrastructure debt at BNP Paribas Asset Management


While not immune to the consequences of Covid, infrastruc- ture debt proved to be a resilient asset class by continuing to generate stable income. Key sectors, such as telecommunica- tions and utilities, encapsulated this resilience through the essential nature of the services provided. 2020 proved to be an incredibly challenging year for markets as Covid-19 triggered lockdowns. The ensuing societal uncertain- ties raised volatility levels across most major asset classes. While not immune to the effects of the pandemic, the proven resilience and stability earmarks infrastructure debt as the ideal investment solution in a post-Covid environment. The growing demand and appreciation of renewable energy as countries embrace the energy transition, in tandem with the digitalisation movement, represent a significant tailwind for the asset class. For investors searching for stable income with contained volatility, infrastructure debt may be a compelling solution for 2022 and beyond.


The first true test of fundamentals


As an asset class, infrastructure debt possesses key characteris- tics that contribute to resilient performance. These include the large physical nature of the underlying asset, high barriers to entry for newcomers and stable revenues linked to the opera- tion and/or construction of the asset.


These key characteristics have allowed a historically strong credit performance with low default rates and high recovery rates (of 0.34% and 76%, respectively) when compared to equiv- alently rated corporate debt.¹


Infrastructure debt typically also delivers relatively high yields compared to equivalently rated corporate debt by virtue of an illiquidity premium. As the projects being financed often have long-term lifespans (of more than 10 years), investors are com- pensated for their commitment with relatively higher yields. Despite this attractive risk-return profile, it is worth noting that European infrastructure debt has been readily accessible to non- bank investors only since the late 2000s. This means that from an asset management perspective, the challenges arising from Covid were the first major test to the resilience of infrastructure debt.


Key characteristics and fundamentals Infrastructure debt broadly involves the financing of loans for projects that provide large, capital-intensive critical assets that underpin economic activity. Typical infrastructure debt financ- es utilities, power generation systems, telecommunications


18 Dec-Jan 2022 portfolio institutional roundtable: Build Back Better


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28