Attractive spreads of more than 300 basis points above the bank-bill swap rate have seen increasing interest from investors in infrastructure debt, according to Industry Funds Management’s (IFM) head of debt investment, Robin Miller.
Miller’s team recently finalised a $90-million debt investment in a senior secured-debt facility to refinance the debt of ConnectEast, owner and operator of Melbourne’s Eastlink Freeway.
The investment forms part of more than $1.2 billion that global infrastructure manager IFM has invested in a range of Australian infrastructure-debt opportunities.
IFM has been investing in infrastructure debt for 13 years with clients in either co-mingled or individually managed funds, according to Miller.
With global regulators squeezing banks to increase their reserves and the knock-on effects of the euro debt crisis hitting access to capital, infrastructure-debt investors such as IFM are well placed to take advantage of attractively priced opportunities.
Miller notes that banks typically offer financing over three-to-five-year periods, while infrastructure debt investors are able to offer funding over longer time frames.
It’s investment in ConnectEast formed part of a $1.2-billion refinancing package, involving banks and one other institutional infrastructure-debt investor.
While the bank proportion of this $1.2 billion was typically over three-to-five-year time frames, Miller says that IFM could meet the need for longer term finance over seven years, with a subsequent illiquidity premium for investors.
Safeguards against the liquidity trap
Unlike other forms of debt or fixed income, the illiquidity is something that Miller stresses when explaining the opportunity to investors.
“During the global financial crisis we never experienced significant redemptions as our debt-investment products have always been only wholesale-focused and have never been misrepresented in terms of their liquidity. That has been one of our most important safeguards,” he says.
“In the credit-retail space, some offered unlimited redemptions and were caught in a liquidity trap in the GFC and had to freeze funds.”
Miller, who was formerly in project finance, lending and risk management at National Australia Bank, says half of the debt-investment team consists of ex-banking professionals.
He makes the point that infrastructure investment on the equity side is a very different proposition to investing on the debt side of the balance sheet.
In contrast to a typical fixed-income investment, the infrastructure-debt investments IFM makes are often in unrated assets, meaning intensive credit analysis on a project-by-project basis, according to Miller.
Due to the lower liquidity, infrastructure investing does not fit easily into a fixed-income portfolio, in which liquidity is a key component of the defensive characteristics of the asset class.
Miller says that investors have either carved out a satellite allocation to infrastructure debt as part of a fixed-income portfolio or have included it as part of an allocation to alternatives.
IFM’s biggest single mandate for infrastructure debt is approximately $500 million, with Australian superannuation funds among its clients.