The sustainable investor for a changing world

Poland sewage treatment plant
Portfolio perspectives | Article - 4 Min

European infra debt: An investment for the post-Covid era

While not immune to the consequences of Covid, infrastructure debt proved to be a resilient asset class in 2020 by continuing to generate stable income throughout the year. Key sectors such as telecommunications and utilities encapsulated this resilience through the essential nature of the services provided.

This is an extract from our latest white paper

2020 proved to be an incredibly challenging year for markets as COVID-19 triggered lockdowns. The ensuing societal uncertainties raised volatility levels across most major asset classes.

While not immune to the effects of the pandemic, the proven resilience and stability earmarks infrastructure debt as the ideal investment solution in a post-Covid environment.

The growing demand and appreciation of renewable energy as countries embrace the energy transition, in tandem with the digitalisation movement, represent a significant tailwind for the asset class. For investors searching for stable income with contained volatility, infrastructure debt can be a compelling solution for 2021 and beyond.

2020 – The first true test of fundamentals

As an asset class, infrastructure debt possesses key characteristics that contribute to resilient performance. These include the large physical nature of the underlying asset, high barriers to entry for newcomers and stable revenues linked to the operation and/or construction of the asset.

These key characteristics have allowed a historically strong credit performance with low default rates and high recovery rates (of 0.34% and 76%, respectively) when compared to equivalently rated corporate debt. [1]

Infrastructure debt typically also delivers relatively high yields compared to equivalently rated corporate debt by virtue of an illiquidity premium. As the projects being financed often have long-term lifespans (of over 10 years), investors are compensated for their commitment with relatively higher yields.

Exhibit 1: Yield premiums for European infrastructure debt relative to equivalently rated corporate debt

Source: BNP Paribas Asset Management, May 2021, Bloomberg. Corporate bonds: Average option-adjusted spreads by credit rating for non-financial corporate bonds (BAML, EN10/EN20/EN30/EN40/HE1C, 30 April 2021). European infrastructure debt: Estimated average based on a sample of market observations.

Despite this attractive risk-return profile, it is worth noting that European infrastructure debt has been readily accessible to non-bank investors only since the late 2000s. This means that from an asset management perspective, the challenges arising from Covid was the first major test to the resilience of infrastructure debt.

Key characteristics and fundamentals

Infrastructure debt broadly involves the financing of loans for projects that provide large, capital-intensive critical assets that underpin economic activity. Typical infrastructure debt finances utilities, power generation systems, telecommunications systems, transportation systems (including roads, bridges, airports and rail networks), as well as other fundamental facilities that provide essential services.

Large physical assets: The projects financed are not only large physical assets, but typically operate in markets with high barriers to entry. These features are beneficial to investors from both a risk and a performance perspective. As infrastructure debt investments have significant underlying collateral in the form of the large physical asset, there is greater security and a higher recovery rate in the event of a material credit event. High barriers to entry reduce potential competition for the services that a project will provide, mitigating risk from a performance perspective.

Stable revenues: Infrastructure debt typically involves regulated and/or contracted revenues. An example is the financing of a photovoltaic (solar) power plant, where there will be priority of dispatch off the grid. That is, there is contractual uptake of the service provided, ensuring stable revenues. Furthermore, many services produced by the infrastructure will bear low technological risk and resilience to economic cycles.

Cash flow-based lending: Investments in infrastructure debt relate to the operation and/or construction of a single asset or a portfolio of assets. From an investor (or lender) perspective, performance is cash flow-focused, with little to no emphasis on the price of the underlying asset.

Portfolio diversifier: As an alternative asset class, the nature and characteristics of infrastructure debt mean there is a low correlation to financial markets, especially against the more traditional asset classes (i.e. equities and core fixed income).

European infrastructure debt: A resilient asset class supported by future trends

While 2020 was an immensely challenging year for financial markets, infrastructure debt proved to be relatively resilient: Many essential projects continued to operate throughout the height of the pandemic. This was not only testament to the quality of the asset class, but a timely reminder of its ability to generate stable income irrespective of market conditions.

Looking ahead, we believe European infrastructure debt is well positioned to perform in the coming years. The asset class is poised to benefit from the digitalisation and energy transition trends, which are a strong tailwind driving demand for telecommunications and renewable energy infrastructure.

Moreover, the infrastructure market should continue to need more financing for projects that provide essential services. In considering this positive outlook together with the core fundamental strengths of the asset class, we believe European infrastructure debt is – and looks set to remain – an attractive investment opportunity.

[1] Moody’s, Default and Recovery Rates for Project Finance Bank Loans, 1983-2019, Moody’s definition of default

For a comprehensive view of the role European infrastructure debt can play in the post-Covid era, read European infrastructure debt: Resilient and essential in the post-Covid environment written by  Karen Azoulay, head of infrastructure debt and lead manager of the BNP Paribas European Infra Debt Fund, a multiple award winning sustainability fund.

Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Related insights

Embedding ESG into private debt can reduce risk and add opportunity
13:28 MIN
Market weekly - What to expect after the Great Pandemic of 2020 (podcast)
Daniel Morris
2 Authors - Portfolio perspectives
06-23-2020 · 2 Min

In the U.S., this material is for Institutional use only – not for public distribution. This material is provided for educational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations. Reliance upon information in this material is at the sole risk and discretion of the reader. The material was prepared without regard to specific objectives, financial situation or needs of any investor.

These documents and video clips may also include information obtained from affiliated investment management companies within BNP Paribas Asset Management, the brand name of the BNP Paribas group’s asset management services. The documents and video clips are produced for informational purposes only and do not constitute: 1. an offer to buy nor a solicitation to sell, nor shall they form the basis of or be relied upon in connection with any contract or commitment whatsoever or 2. investment advice. Any opinions included in these documents and video clips constitute the judgment of the author/ presenter at the time specified and may be subject to change without notice.

This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, and estimates of yields or returns. No representation is made that any performance presented will be achieved by any funds, or that every assumption made in achieving, calculating or presenting either the forward-looking information or any historical performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the investment returns that are presented herein. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BNP PARIBAS ASSET MANAGEMENT USA, Inc. to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.


BNP Paribas Asset Management seeks to integrate environmental, social and governance (“ESG”) factors into all of our portfolios as a means to mitigate certain short, medium and long-term financial risks, identify better long-term investments, and encourage more responsible corporate behavior. We will never subordinate our client’s interests to unrelated objectives. Certain issuers and industries are excluded from our actively managed portfolios based upon our view of their ESG performance and risk profile. As a result, we may pass up certain opportunities when these excluded issuers or industries are in favor. Due to significant gaps in disclosure regimes around the world, we may need to rely upon voluntary disclosures by issuers, which are often not audited. We therefore may not have consistent access to complete, accurate or comparable information about the ESG performance of our holdings. Please consult the applicable offering document for more information about the specific ESG strategy employed by each investment strategy since a given strategy may not have specific ESG guidelines, and investments are not limited to securities that are ESG compatible.

BNP PARIBAS ASSET MANAGEMENT USA, Inc. is registered with the U.S. Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended. BNP PARIBAS ASSET MANAGEMENT USA, Inc. is a registered trademark of BNP Paribas or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. © 2024 BNP PARIBAS ASSET MANAGEMENT USA, Inc., All rights reserved.

BNP PARIBAS ASSET MANAGEMENT is the global brand name of the BNP Paribas group’s asset management services. © 2024 BNP PARIBAS ASSET MANAGEMENT USA, Inc., All rights reserved.

To access insights from our teams worldwide visit:
Explore VIEWPOINT today