Queensland Investment Corporation (QIC) has formed a new fund to buy up stakes of $50 million or more in the debt of big infrastructure players as other investors, such as hedge funds and investment banks, sell their credit exposures to the sector.
Among the recent transactions are stakes of more than $50 million in the debt of airport company BAA, Thames Water and Texan energy provider TXU. The deals are either sourced from the secondaries market for infrastructure debt or primary issuances of debt. QIC bought the BAA debt at $0.62 in the dollar, and the Thames debt at $0.74 in the dollar, Susan Buckley, managing director of active management at QIC, said.
She described the allocations as “defensive high yield” investments that could produce returns ranging between 12 and 15 per cent as credit spreads seem likely to remain dramatically wider for some time.
“Spreads are at levels not seen since the Great Depression,” Buckley said, before adding that a default rate of up to 25 per cent had been priced in to debt securities, while the actual rate was between 3 and 4 per cent.
The fund, which holds $1 billion under management and is named the Global Credit Opportunities Fund, was invested in the senior secured debt of “brownfield-type” infrastructure assets, rather than “ greenfield” early stage projects, she said.
It currently allocates 18 per cent to transportation, 14 per cent of its assets to energy, 14 per cent to telecoms, 13 per cent to broadcasting, 12 per cent to corporate debt, 11 per cent to water infrastructure and 10 per cent to utilities. It also holds some structured credit assets, such as collateralised loan obligations, and some cash holdings. Most of its assets, 43 per cent, are in the UK. The fund does not invest in emerging markets.
The fund became active in February but had been making plenty of allocations in recent weeks as a “second wave” of investment opportunities swept through credit markets in the year to date, Buckley said.
“We’ve been interested in this space for the last two-to-three years. Spreads had been tight for more than a decade, and [this strategy] was about positioning around a high-spread environment.”