In it for the long run

The new generation of investors in European infrastructure debt won’t be easily put off – except, perhaps, by an attempted helping hand.

There’s an apparent contradiction in the European infrastructure debt market that you might expect would soon cease to exist. Namely, that appetite from institutional investors is not waning even as pricing pressure increases and returns come down.

You may well volunteer the opinion that resolving this contradiction is just a matter of time – eventually, the market will become sufficiently overheated that there is bound to be a significant retreat. And yet, say participants, even in the face of fairly extreme adverse pressures, many of those in the market today appear to be committing for the long run.

It’s true that there are parts of the market – e.g. Private Finance Initiative (PFI) debt – where price compression and lack of new deal flow are especially problematic. No one would be too shocked to see some withdrawals from these subsets of the market where institutions have chosen to focus their activities rather than being more flexible in their investment options.

Furthermore, there were the opportunists who were drawn to the infrastructure debt market post-Financial Crisis to pick up positions being sold at large discounts by banks departing the scene. Many of these groups will also leave the playing field for the simple reason that they never intended to make a long-term commitment.

But, taken as a whole, the market is still seeing far more enthusiasm to stay put than head for the exit. And there are at least three reasons why: one, there continues to be a perceived illiquidity premium (though smaller than it used to be); infrastructure debt is highly valued for its liability-matching characteristic; plus, it is seen as a refuge from fixed income. All these are compelling reasons for sticking with infrastructure debt even in the face of adverse market pressures.

Another factor is efforts being made by governments and regulators to boost the infrastructure debt market. For example, towards the end of last year, Italy saw its first project bond in the Antin Solar refinancing – a landmark deal assisted by new Italian regulation offering investors tax benefits and security advantages.

But while this was undoubtedly a useful form of assistance, there are those who are concerned that – taken to an extreme – measures designed to stimulate the market may prove decidedly unhelpful given that liquidity has now returned to something like pre-Crisis levels.

The €315 billion investment plan unveiled by European Commission President Jean-Claude Juncker appears to be a major concern given its potential ability to further widen the gap between demand and supply. It would be an irony indeed if it were a market booster that pushed the market to breaking point.

*Look out for the March 2015 issue of Infrastructure Investor, which includes an infrastructure debt-focused roundtable discussion reflecting on these themes and plenty more.