Infrastructure Debt

Infrastructure debt offers an excellent investment opportunity given the relative stability of returns and low default risk that derive from the nature of the borrowing business. The low default risk is accompanied by relatively higher recovery rates in the unlikely event that a default does occur. The combined result is lower expected losses from defaults and hence very low or even non-existent loss rates overall, compared to otherwise similar corporate credit risk.

Infrastructure debt provides a form of out-performing, high quality credit risk asset that pays a reliable income stream based on interest payments. These payments may be inflation related (depending on whether the asset is floating rate and on the nature of the linkage between floating rates in the banking system and the local economy).

As a result, infrastructure debt is not only comparatively more defensive than other types of credit risk assets, but can offer a partial substitute for traditional defensive assets such as sovereign bonds. This is especially so where sovereign bonds are offering artificially low returns (and perhaps negative real returns in present times) due to monetary policy or where once safe-haven sovereign bonds are now posing significant concerns about both their credit and market risks.

This credit investment strategy is often taken up by our investors in the form of individual mandates, although it also forms a sub-set of our broad-based credit fund, the Alternative Fixed Income Fund (AFIF). For a separate mandate, the investment objective is subject to negotiation and is influenced by the opportunity set, the investor's risk tolerance and prevailing investment environment.

Investment approach

IFM’s approach to infrastructure debt is characterised by intensive bottom-up, asset-specific credit analysis. This is supported by top-down macro views where these are relevant to the assets noting that a hallmark of infrastructure is that it should be more resilient to macro-economic headwinds than other credit risk sectors. The approach relies on the discipline of a rigorous, detailed written credit analysis that is subject to scrutiny by peers and forms the basis of the investment recommendation. We internally rate all investments regardless of whether they carry an external credit rating. IFM’s considerable analytical resources, extensive business infrastructure and legal expertise, further supports the strategy.

Market knowledge and deal identification

The team’s 13 years of experience in infrastructure has bred an intimate understanding of infrastructure markets and gives us a wide network of contacts. This extensive network provides access to a wide range of high quality transactions. IFM is also a desired debt participant for major new public-private partnership (PPP) syndicates.

Investment process

IFM’s credit investment processes adopt strong credit disciplines underpinned by a rigorous, bottom-up analysis across a six stage process:

 

 

  1. Asset screening and portfolio fit
    Our market contacts provide access to a wide range of high quality transactions. Our approach to seeking value means that we screen as many potential transactions as possible, rejecting at an early stage transactions with unfavourable risk and return profiles, or those which do not align with portfolio and client needs. Not all high credit quality infrastructure debt deals offer optimal value to investors.

  2. Fundamental credit analysis
    All credits are internally rated through a bottom-up analysis at the micro level, within a macro-economic framework. We seek to understand factors such as the key drivers for the business sector and the determinants of any residual cyclicality. We examine financial metrics, but more importantly what drives these. We examine the risks of default and recovery prospects through stress tests and scenario analysis. We consider the borrower and, where relevant, its shareholders’ stability as well as legal and tax matters. We also examine Environmental, Social and Governance (ESG) issues, not least as IFM is a signatory to the United Nations Principles for Responsible Investment.

  3. Detailed written credit assessment
    A detailed written credit assessment is prepared for review by the Global Head of Debt Investments and the Debt Investments Committee. We employ the discipline of written and transparent analysis that can be closely scrutinised by both peers and approval authorities to avoid untested and fuzzy presumptions about risk. This document must withstand internal, and potentially external, scrutiny and also justify portfolio fit and value.

    Although the document may largely be prepared by a credit analyst, the input of senior team members is required on all aspects of the analysis. It concludes with an investment recommendation that has to be supported by both the analyst and the portfolio manager. The input of the other IFM investment teams, including the Infrastructure Equity Group, is also used where appropriate and valuable, providing unparalleled access to experienced resources.

    Note that in general IFM’s pooled credit funds will not invest debt in infrastructure businesses in which the IFM infrastructure equity portfolio is invested as this can give rise to doubling up of exposures for some of IFM’s investors. This rarely gives rise to lost opportunities as what is a good debt deal for infrastructure equity investors is not often good value to debt investors. The opposite is also true. This also means that concerns about conflict of interest, governance confidentiality of information etc., are usually misplaced. In any case this may not be a practical limitation for investors via individual mandates.

  4. Formal credit approval
    IFM’s investment approvals regime provides clear delegated authority levels. Specific dollar thresholds apply at which the investment decision must be made by a higher authority such as the IFM Investment Committee and, ultimately, also the Board Investment Committee.

  5. Monitoring, reporting and review
    Ongoing management of the portfolio is critical. We continuously monitor the assets both in terms of the macro-economic environment as well as at the asset level, but we also conduct periodic formal reviews.

  6. Compliance and risk management
    We have strict compliance and risk management processes in place with oversight by IFM's Risk Committee.