Key Takeaways
- Junior infrastructure debt provides investors with access to regular, stable, and defensive income streams, generally uncorrelated with fluctuations in public equity markets, providing a reliable source of risk-adjusted returns.
- We are seeing significant premiums in junior infrastructure debt compared to senior infrastructure debt in this market.
- When compared to senior infrastructure debt, we view junior infrastructure debt as offering a compelling relative value proposition. It typically demonstrates a favourable risk/reward profile and an internal rate of return (IRR) approaching core infrastructure equity investments.
- Amidst a “higher for longer” interest rate environment, we anticipate a continued positive outlook for junior infrastructure debt in the medium term as performance is closely tied to inflation. Infrastructure debt typically utilises a floating interest rate strategy, allowing investors to benefit from current market conditions.
- Transaction activity is strong, particularly in the realm of refinancing for businesses with substantial capital expenditure, and to fulfill the infrastructure capital requirements that will support the energy transition.
What is private debt infrastructure?
Despite its compelling attributes, private debt infrastructure has sometimes been overlooked compared to some of its private debt and equity counterparts. However, as the world has emerged from a “lower for longer” economic environment, attention on this inflationary-linked asset class has rightly risen.
By their nature, infrastructure assets ranging from roads and airports to energy and digital facilities are valuable and defensive businesses, providing mission-critical services to society. These assets characteristically benefit from high EBITDA margins and are secured by robust cash flows, attributes which are frequently underpinned by long-term contracts, high barriers to entry, regulatory regimes or by virtue of being in a monopoly position. Through private debt instruments, institutional investors can access the advantages of infrastructure assets while benefitting from a debt position’s shorter tenor and favourable position in the capital stack.
The lower rating volatility of infrastructure debt investments also proves compelling. Figure 1 compares the long-term rating volatility of asset securities, comparing infrastructure to non-financial corporates/non-infra businesses. Over this period, total infrastructure securities showed little volatility to major global market shocks, including the Global Financial Crisis (2008-09), the Euro Sovereign Default Crisis (2015-17) and COVID-19 (2020-22).
Figure 1: One year rating volatility, 1983 – 2021: total infrastructure securities and non-financial corporate issuers1 Infrastructure debt strategies can play a key role in portfolios, acting as a diversifier uncorrelated to public equity markets and a contributor to overall performance.
Infrastructure debt can take on various forms, as illustrated in the typical capital structure of an infrastructure asset below (Figure 2). Each type of debt (and equity) carries different levels of risk and return (Table 1).
Figure 2: Infrastructure Debt in a Capital Structure2