Infra investors fear volatility post-Brexit

Short-term currency wobbles and a decline in project deal flow are the top items concerning institutional investors when thinking of Brexit, according to Standard & Poor's.

“The lion’s share believes that a Brexit, or UK exit from the EU, would zap investment for infrastructure – mostly in the two years after the vote (71 percent), and perhaps longer (47 percent),” S&P said in a report. “And about one-half of respondents cite concerns about macroeconomic turbulence and political instability.”

The ratings agency surveyed 51 investors in the UK and abroad including infrastructure funds, investment management companies, insurance companies, hedge funds, pension funds and sovereign wealth funds.

A 'Leave' vote would probably trigger the pound sterling to depreciate, S&P noted. This would impact investors through lower and more volatile returns as well as increases in funding costs for debt denominated in currencies other than the pound. Higher costs for import-reliant projects in the development phase could also hurt debt and equity holders, the agency believes.

Aside from currency volatility, the ensuing uncertainty that would follow a Brexit also has the potential to deter those investors who have preferred the UK market because of its stability and predictability. 

S&P observed, however, that “domestic investors could stand to benefit from increased returns for their investments” should competitive pressure from abroad ease as a result of Brexit.

Another factor to be considered, the agency said, is what the event would mean in terms of funding from the European Investment Bank. According to S&P, the EIB has invested more than €42 billion in the UK over the past eight years, of which €19.1 billion went to infrastructure. Furthermore, the UK is the fourth-largest shareholder in the EIB. Although non-EU member states can qualify for funding, constitutionally EIB shareholders must be EU member states.

“It is not expected that the EIB would withdraw committed funding or call back existing loans,” the ratings agency said. “However, considering that EIB funding to the UK has been comparatively high in recent years and that future decisions would be in the hands of the remaining member states, future lending to Britain may be called into question or pared down.”

The UK is also seeking funds from the European Fund for Strategic Investments (EFSI), also known as the €315 billion Juncker plan, which falls under EIB governance. It is unclear whether funding already approved – €972 million was cleared last year for UK-based projects – would be withdrawn or reduced.

“All in all, uncertainty introduces risks for both domestic and foreign investors, and therefore concerns for debt financing and credit quality,” S&P said. “But these risks also mean that opportunities for capturing higher returns arise, which could ignite some unexpected activity in the sector. It is said that perception is reality, and based on what investors are telling us, the reality is that a Brexit scenario could put long-term funding for UK infrastructure at risk.”

However, S&P also noted that less than half – 44 percent of those surveyed – believe the UK is likely or very likely to leave the EU. The UK will hold its referendum on 23 June.