AMP sees rise in ‘financial engineering’ for infrastructure

But the ‘financial engineering’ of the future will be defined more by growth in hybrid and mezzanine debt and equity and less by over-leveraging of infrastructure projects, according to an infrastructure report by AMP Capital Investors.

Investors can expect to see more “financial engineering” in infrastructure over the next five years, according to one long-standing Australian investor in the asset class.

AMP Capital Investors, the private investment arm of Australian wealth manager and insurer AMP Limited, argues in a recent infrastructure research report that “high demand for debt” will drive “innovation in financial engineering” for infrastructure projects.

In the wake of the financial crisis, the term “financial engineering” became synonymous with the over-leveraging of infrastructure projects in order to drive higher returns – an often-criticised and discredited strategy among many investors.

But the financial engineering of the future is likely to be defined less by over-leveraging and more by demand for different types of debt instruments, according to AMP.

“For example, we anticipate a significant growth in hybrid or mezzanine debt/equity projects,” AMP said in the report. “These will be used where they can reduce the net cost of funding”, AMP added, and “should be used with caution and never to overgear a project.”

In response to the demand for debt financing and refinancing, several investors have already started raising debt infrastructure funds. Marc Bajer, the former head of Assured Guaranty’s European business, is seeking €500 million for a debt fund that will take subordinated debt positions within senior-ranking infrastructure bonds. Spence Clunie, the former Macquarie Capital debt veteran, is seeking up to €1 billion for a debt fund that will inject junior debt or equity into debt refinancing of infrastructure projects.

AMP also recently hired a team of professionals in New York led by Tom Majewski who have experience investing in both infrastructure debt and equity.

AMP predicts that debt will comprise 75 percent to 80 percent of the funds raised by the private sector in the next five years, with equity filling out the remaining 20 to 25 percent.

AMP believes equity investors will continue to face high-growth prospects in the emerging economies of India and China, which are expected to spend between 8 percent and 10 percent of their GDP on infrastructure annually.

Europe will provide investors with an opportunity to invest in existing infrastructure assets: “We expect to see increasing asset sales across Europe as governments seek to reduce debt and fund programs,” AMP said.

In the US, privatisation “could face significant grassroots political opposition”, AMP said. But the US will continue to offer opportunities in renewables, telecommunications and utility sectors, AMP believes.

“Significant structural reform would be required before the private sector can fully engage across all sectors [in the US],” AMP said.