Investors want infra debt, if not debt funds

JP Morgan’s announcement that it is setting up a new team dedicated to infrastructure debt shows that institutional investors are interested in this investment space, especially in a low-interest rate environment.

Today’s announcement that JP Morgan Asset Management has hired Bob Dewing, ex-Citigroup and a project finance professor at Columbia University, to lead and set up a dedicated infrastructure debt team is good news for the those striving to again marry institutional investors to infrastructure debt.

The news is good on two fronts. First, it bolsters confidence in the space to have a big brand name like JP Morgan saying it feels buoyed enough by the infrastructure debt opportunity to create a dedicated team. And secondly, it highlights what many in the industry have long known: post crisis infrastructure debt, with its attractive pricing, is appealing to institutional investors, especially in a low-interest rate environment.

The timing for the announcement is certainly right. 

Yesterday, the US Federal Reserve left interest rates untouched at between 0 percent and 0.25 percent – the same range its rates have hovered at since the 2008 crisis burst. And a few hours ago, Mario Draghi, in his debut press conference at the helm of the European Central Bank, announced that the bank would cut its benchmark rate by 25 basis points to 1.25 percent, as the European sovereign debt crisis rages on.

Of course, it’s long been known that institutional investors like infrastructure debt – after all, a €100 billion bond market thrived in Europe from 2000 to 2007 until the monolines went bust. The problem is how to get investors to access infrastructure debt.

In its announcement today, JP Morgan said that the new debt team will primarily target “seasoned loans [held by project finance banks] with attractive risk adjusted yields”. While somewhat vague, the wording makes it clear that JP Morgan will not be originating loans. Also, “seasoned” probably means these loans will not be the sub-100 basis points project finance loans that banks originated prior to the crisis.

The second part of its debt strategy is highlighted by Mark Weisdorf, chief executive of JP Morgan’s Infrastructure Investments Group. He says: “The growing volume of infrastructure debt holders looking to divest is exciting.” To which Dewing adds: 

“Becoming increasingly focused on capital returns and with traditional sources of longer-dated infrastructure credit such as bond insurance no longer available, we are finding banks are seeking new ways to recycle their limited capital.”

Or put differently: banks are in a jam and desperately need to deleverage. And with new regulations like Basel III potentially making the holding of long-term infrastructure debt less attractive, JP Morgan is in a strong negotiating position to build an attractive portfolio of project finance loans for its institutional clients.

Time will tell if JP Morgan’s strategy will be successful. But the group’s announcement clearly shows that there is appetite for infrastructure debt.

The lack of success some infrastructure debt funds have encountered in the market is not necessarily due to a lack of appetite for infrastructure debt; it’s to do with devising the best structure for institutional investors to access infrastructure debt. Once that structure is found, this promising market will almost certainly flourish again.