Finding attractive relative value in sub-investment grade infrastructure debt
Summary
Many investors seek to mitigate the business and financial risks associated with infrastructure debt by primarily targeting the investment grade segment of the market. Such instruments are deemed to have a low risk of credit default by rating agency methodologies. This includes debt rated BBB- or higher by Standard & Poor’s and Fitch, or Baa3 or higher by Moody’s. Returns in this part of the market are resilient, but they are also constrained by the relatively low level of risk that investors are assuming.
FIGURE 01: SUB-INVESTMENT GRADE CUMULATIVE DEFAULT RATES
Source: Moody’s and IFM Investors
We believe it is possible to generate higher returns by investing in sub-investment grade infrastructure debt where credit spreads on offer in the current market environment typically range between 400-600bps. We believe this represents good risk-adjusted value if the higher credit risk is well understood and appropriately balanced when both business risks and financing structures are taken into consideration.
In this paper, we outline our approach to investing in sub-investment grade infrastructure debt and illustrate the process with case studies that highlight the strength of our due diligence process and our ability to assess and trade-off the multiple risk factors associated with each transaction.
About the author
Head of EMEA and Australian Infrastructure Debt
David Cooper
Joined in 2012
David is head of IFM Investors’ infrastructure debt business in EMEA and Australia. He and his team are charged with sourcing infrastructure debt deals and conducting credit analysis of prospective investments, as well as management and marketing IFM Investors' capability in this speciality. David has more than 20 years’ experience in banking focused on project finance, infrastructure debt and structured credit. He joined IFM Investors from Barclays UK, where he was Head of Infrastructure and Structured Project Finance within their Corporate Bank. David began his banking career with RBS in the early 1990s, focusing on structured and public sector finance globally, before moving to HBOS in 2000. There, he worked in the origination team of the HBOS Infrastructure Finance unit where he had responsibility for sourcing and executing senior debt, mezzanine and equity in the social infrastructure, transportation and energy sectors, before moving to Barclays in 2004.
About the author
Debt Product Specialist
Jacob Otto
Joined in 2021
Jake is a debt product specialist at IFM Investors. Jake provides specialised support for debt client and prospective client relationships and product development across EMEA. During his 15 years in the investment management industry, Jake has been focused on public and private fixed income markets including infrastructure, government, credit, and currency working with clients across the globe. Prior to joining IFM, Jake worked at Wellington Management and Income Research + Management.