Three early takeaways from covid-19’s impact on infra

Asset bounce-backs harder to predict, the importance of contractual structures and why certain fund vintages might become problematic.

Covering a lightning-quick pandemic has been one of the challenges – albeit a minor one, compared to the challenge of having life upended by covid-19 – of the past two weeks.

On the one hand, it is our job, as information providers, to bring you as much insight as quickly as possible on how the current crisis is affecting the asset class. On the other, we are painfully aware that events might promptly render some of this insight obsolete – almost immediately after it’s published, in some cases.

It’s also hard to draw lessons from the situation, considering how much is still unknown. But with about a quarter of the world’s population estimated to be on lockdown and economies grinding to a halt, here are a few takeaways from our covid-19 coverage so far (check out our coronavirus hub for all our stories):

Brutal shock to demand means all bets are off

 “From my experience with airports, after a crisis or disruption traffic would generally bounce back to where it was before within a year or so and continue its long-term growth trajectory with the relevant crisis being a minor blip,” Tom Laidlaw, of Infrastructure Capital Group, told us earlier this week. He added:

“I can’t recall ever dealing with a disruption that for most airports had a more than 20-30 percent traffic drop for more than six months. What we’re seeing now is totally unprecedented – airports haven’t completely shut down, but the drop-off in passengers is going to far exceed those previous drop-offs.”

One source suggested that their current working assumption is that international air travel is unlikely to return in any significant way until a vaccine is developed, with countries likely to prove unwilling to re-open borders to other nations where the virus is still circulating.

Or put differently, past performance may really not be indicative of future results, as covid-19’s brutal shock to demand clouds how quickly assets will bounce back from this crisis.

Contracts and financing structures matter …

“Traffic over the GFC slowed down over a six-month period and more. This is a sudden shutdown and you can lose 50-100 percent of your traffic, but for a shorter period, given what we’ve seen in China. This will hit very fragile structures that were over-leveraged or very cash-tight versus the long economic crisis which tends to gradually take its toll,” warned Meridiam’s Thierry Déau, in our analysis of how the transportation sector is faring.

It’s a good reminder that how conservative you’ve been in structuring your assets might really make or break them in this crisis. But it also highlights how important contractual structures will be in determining the health of even the hardest hit assets.

As DIF Capital Partners’ Allard Ruijs told us: “We are of course seeing less traffic [across our roads] so less payments [but] we also have a lot of PPP transportation assets where there is no real financial issue given they are availability-based.”

Still, as one source pointed out, even toll roads with largely traffic-based revenues are not necessarily suffering at this point in the crisis, with traffic falls being somewhat balanced by a big increase in the flow of trucks delivering goods and services.

… and so do fund vintages

This is not exclusive to infrastructure, but as Kelly DePonte, a managing director at Probitas Partners responsible for research, said on a webinar hosted by the Investment Management Due Diligence Association late last week:

“This is going to hurt legacy portfolios more than it’s going to hurt funds that are trying to raise money right now. If you’re a 2017 vintage fund and you have put out a lot of money already, those portfolios might be problematic.”

As we wrote last week, those with dry powder are waiting for the dust to settle to see what smart buys they can make. DePonte’s comment is a reminder that it’s perhaps better to have money in hand than to have just finished investing it.

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