Today, firms seeking to finance an infrastructure project by raising debt have a broad range of financing sources including banks, but also direct investors such as insurance firms and, increasingly, pension funds. This growth in the type of lenders for infrastructure project finance following the 2008 financial crisis has facilitated increasing levels of direct investment in the real economy, and provided a new source of yield for these direct investors. Infrastructure debt may also appeal to existing and prospective investors due to its relative security of capital and potentially improved risk/reward characteristics compared to other forms of corporate debt1.
However, investing in project finance has its own unique set of challenges and risks which should be thoroughly understood and addressed in order to benefit from these potential advantages. IFM Investors has been allocating to infrastructure debt for two decades and, as an experienced project finance practitioner, can share many insights in this area. It is important to define what we at IFM Investors mean by Infrastructure Debt.
Establishing a common understanding is important, as the definition may vary from manager to manager. IFM Investors defines Infrastructure Debt primarily by a set of characteristics that differentiate it from the wider corporate credit market. As a result, we only classify an investment as Infrastructure Debt if it demonstrates a relatively low probability of default; stable credit ratings throughout the cycle, and high recovery upon an eventual default. Typically our investments fall within what most managers and investors would view as mainstream, core, infrastructure – i.e. social infrastructure, transport, energy and utilities.
Whatever the definition, we believe the main aim of managers should be to identify opportunities to provide debt to infrastructure that is relevant and important to the society and economy economy in which it operates. It is important that this test is passed not only at the point of investment but also through the life of the asset. This caveat is crucial. Whilst it is relatively easy to spot the white elephants of today, it is more difficult to spot those of tomorrow, especially in our world of intense, rapid technological change. Generally lending to essential community assets underpinned by proven technology can alleviate this risk.
Moody’s Infrastructure Default and Recovery Rates, 1983-2017 (published September 27, 2018); Moody’s Default and Recovery Rates for Project Finance Bank
Loans, 1983-2015 (published March 6, 2017); Moody’s Special Comment: Annual Default Study: Corporate Default and Recovery Rates, 1920-2013.