Infrastructure debt: income and resilience

Contracted revenues are key

Most recently, investor appetite for essential infrastructure assets embedded in high value supply chains, such as pipeline and storage, has been strong, driven by corporates more actively selling them to raise cash and improve balance sheets. In addition, debt issuance for digital assets like data centers, cell towers and fibre spiked as connectivity needs for a distributed working and learning environment increased. The continued migration towards 5G also helped fuel these transactions.

Sectors that have experienced declines were predominately those sensitive to cyclical market conditions, such as transportation. While activity is improving for toll roads, airport recovery remains stagnant with disparate performance across assets. For example, regional airports are faring better than international. Meanwhile, energy assets are facing several challenges impeding recovery, including lackluster demand, weakened counterparties and emergent regulatory risks.

In the U.S., all eyes have been on the Biden Administration’s US$2 trillion+ infrastructure and jobs plan which proposes investment in areas spanning transportation, renewable energy, broadband assets and vehicle electrification. We believe this will likely place more pressure on utilities with higher overall power generation than traditional energy sources, in addition to serving as a warning flag for stricter regulatory and policy pressure on domestic producers of coal, oil and natural gas. Some other potential implications we see include a heightened focus on urban transportation investments and tailwinds for telecom and data assets, despite recent growth driven by the transition to a remote work paradigm.

An increasingly diversified story for infrastructure debt

Change in global issuance by sector, 2010-2020

Rebound resilience: remote work and renewables

Infrastructure debt has expanded significantly over the last decade. Today, the asset class offers investors a wide variety of options to help build portfolio resilience and access diversified yield enhancement opportunities.

Most recently, renewables, utilities, telecom and certain parts of social infrastructure have thrived; whereas transportation assets—especially airports—have faced pressure. Long-term themes of digitization and energy transition have only been strengthened by the pandemic and will continue to be attractive sectors. We also expect stronger opportunities in transportation over time given the essential nature of the assets in the post-COVID 19 world, despite a lower GDP growth trajectory and some changes to usage habits.

In terms of growth potential, we see compelling opportunities in telecom—specifically fibre—as the data needs associated with the shift to remote work increase.

In France, for example, fibre-to-the-home is now considered a core infrastructure component and government-regulated, which is driving investment and consumer adoption. Further, the regulatory framework ensures that there is no risk of overbuilding fibre-to-the-home lines in each jurisdiction despite the monopoly position providers are awarded with their licences, in addition to overseeing cost-per-line to prevent price gouging.

The French Government is also supporting the target for copper decommissioning by 2030, with legal mandates and financial penalties in force to strongly incentivize achieving it. From an ESG perspective, this is positive—not only due to the reductions in electricity usage and CO2 emissions that will result, but also because it will help provide faster internet access in underserved areas of the country.