Funds move into long-term infrastructure debt as banks exit
Tougher capital requirements on banks are causing their exodus from long-term infrastructure debt, providing opportunities for institutional investors in a strong asset class, fund managers said.
Heavy capital requirements for longer tenure debt under Basel III are “causing huge grief” for banks, forcing them from their much-loved infrastructure asset class, Hasting Funds Management executive director, infrastructure debt, Steve Rankine.
“Traditionally, banks have dominated this market, with 80 to 95 per cent of infrastructure debt having been controlled by the banks for years,” Rankine said. But long-term lending, which had been a feature of infrastructure debt, is no longer of great interest to banks, he explained.
“The banks are still very active in infrastructure debt; however, they’re very much more focused on the 5- to 7-year term, and it leaves a very big gap for institutional money in the 10 years-plus space − all driven by regulation.”
Rankine made his comments at the Investment Magazine Fiduciary Investors Symposium in Healesville, Victoria, November 13-15, 2017, during a panel on the topic, ‘Real assets – regulatory changes and the key forces at play’.
Negative effects from the Basel III global banking capital reforms, designed to increase bank liquidity, are balanced by positives from Europe’s regulatory framework Solvency II, which is encouraging European institutional investors to pursue borrowers exhibiting quality cash flows capable of matching their long-term liabilities, Rankine said.
Institutions in Germany, France and Italy were all expected to take up infrastructure debt, he said, while there was real value for investors in the US, where regulators were lessening the capital penalty applied to non-investment grade debt.
While banks are pulling back, infrastructure debt was still a good performing asset class, Invesco managing director, client portfolio management, Max Swango said.
Government regulations are now limiting what banks can lend for real estate to a loan-to-valuation ratio between 50 per cent and 70 per cent, and borrowers need more debt than that, he explained.
This was causing strong capital flows from the US into global real estate and increased cross-border investment from developed countries as institutions looked to diversify, he said.
“I can tell you from travelling around the world that developed countries Australia, Canada, the US, China, Korea, Japan, Germany, Switzerland and the Netherlands are all showing strong cross-flows of property today,” Swango said. “Most investors have been investing in their own domestic country for a long time, so [they] have their fill of their own country and are starting to look abroad for diversification reasons, just like you do in public markets.”
Renewables power infrastructure demand
Investor appetite was also good for infrastructure, particularly in the renewable energy sector, BlackRock institutional business global head Edwin Conway said.
Conway said the necessity to harness wind and solar energy for a growing global population and the retirement of old coal and nuclear generators in developed countries would drive private capital investment in renewable infrastructure.
“As we rank each one of the assets and how you think you’re going to extract return, we definitely look at sovereign risk,” he said. “That really does determine the types of subsidy that may or may not be available in the future and what may be retrospective and there is some risk there.”
He added that while some governments’ energy policies, including subsidies, present sovereign risk, market fundamentals are strong . Also, BlackRock’s recent discussions with French and Canadian governments on their renewable infrastructure needs showed there was strong demand for private capital.
Subsidies are also “less necessary” for renewable infrastructure investments because of cost savings and stronger demand for green power, he explained.
“The reality is that the demand [for private capital] is so rich from every sovereign right now – more than you’ve ever seen – that [subsidies] are becoming so much less of an issue than they have been in the past,” he said.
It was not clear which countries he was talking about it was a general comment about subsidies which in some cases should be taken off the table as investors model risk for each asset