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Portfolio perspectives | Podcast - 12:32 MIN

Talking Heads – Building on infrastructure debt

Vincent Guillaume
3 Authors - Portfolio perspectives
11-24-2023 · 5 Min

In the context of market volatility driven by high inflation, rising interest rates and (geo)political uncertainty, infrastructure debt has shown itself to be resilient. This asset class can offer investors relatively high and stable income over the long term and steady cash flows; its distinctive features can help diversify portfolios while offering competitive yields.  

On this Talking Heads podcast, Andrew Craig, Co-head of the Investment Insights Centre, talks to Stephanie Passet and Vincent Guillaume, Deputy Heads for Infrastructure Debt.

They cover the reasons behind growing investor interest, demand for refinancing existing debt, climate change and the energy transition as central themes for infrastructure debt, and appealing ‘green’ sectors including battery technology and green hydrogen.

You can also listen and subscribe to Talking Heads on YouTube

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Read the transcript

This is an audio transcript of the Talking Heads podcast episode: Building on infrastructure debt

Andrew Craig: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis through the lens of sustainability on the topics that really matter to investors. In this episode, we’ll be discussing infrastructure debt. I’m Andy Craig, Co-head of the Investment Insights Centre, and I’m delighted to be joined this week by Stephanie Passet and Vincent Guillaume, Deputy Heads for Infrastructure Debt within our Private Assets team. Welcome, Stephanie and Vincent.

Stéphanie Passet: Thank you, Andrew. Glad to be here today.

Vincent Guillaume: Thank you, Andrew.

AC: As we start thinking about 2024, is now a good time to invest in infrastructure debt assets?

VG: The past year and a half has been characterised by significant market volatility driven by high inflation, rising interest rates and political uncertainty. In this challenging environment, we feel investing in infrastructure debt can be a resilient and compelling solution. It can offer investors high and stable long-term income, stable cash flows and diversification versus other asset classes.

The performance in infrastructure [debt assets] has been strong across all sectors thanks to the underlying features of these assets such as inflation pass-through revenues. Infrastructure debt can provide investors with high cash income from attractive, absolute returns. For instance, in current markets, we see junior infrastructure debt offering yields of 8% to 8.5% thanks to rising interest rates, so it is closing the gap with core equity returns.

SP: Since this is a great time for infrastructure debt, not surprisingly, we see a lot of investors expressing interest in increasing their exposure to the asset class – particularly junior or sub-investment grade infrastructure debt – to benefit from [potentially] higher risk-adjusted returns and steadier income. There is also value in traditional senior investment-grade debt which provides an illiquidity premium, in particular strategies focused on mitigating climate change.

AC: What is the market outlook today and in particular, how do you see the balance between equity and debt investments?

VG: While we are seeing some slowdown and deferral of equity projects, we believe the fundamentals of infrastructure as an asset class have remained robust and attractive.

But buyers and sellers need to adjust to the new reality, currently adapting their return expectations, and it could take six to 12 months for those adjustments [to be made]. On the debt side, the pipeline has remained strong. We are seeing a lot of refinancing activity and incremental loan facility growth to finance projects.

Importantly, we are continuing to see a lot of greenfield opportunities driven by the massive needs arising from the energy transition and digitalisation and we expect this trend to continue.

SP: We are also seeing equity sponsors turning more to private debt as they recognise the reliability and flexibility offered by private lenders in terms of execution, certainty and bespoke solutions.

Capital has continued to be deployed actively for infrastructure and we expect that trend to last. We anticipate a lot of activity in 2024, especially related to the refinancing of existing debt, much of which is nearing maturity.

There are also more sponsors looking for products and forms of capital that sit between traditional senior debt and equity, so junior debt. This is a strong trend.

AC: Are climate change and the energy transition still central themes for infrastructure debt?

SP: The overall market is transitioning to low-carbon assets, and we are strongly committed to supporting the transition as public funding is not sufficient to reach net zero emissions by 2050. Private capital is key, and within that, infrastructure [debt] is fundamental to enabling the transition.

It’s not just about renewable energy, although that still represents many transactions given the European objective to raise production of renewable energy to 45% [of the energy mix] by 2030.

Decarbonisation now spans all infrastructure assets, including transportation. It’s about the reduction of carbon emissions through the circular economy and recycling. We see opportunities in this field. Carbon can be captured directly from industrial production, so we foresee opportunities in carbon capture storage in the near future.

VG: We can look at some examples, especially in the clean transportation sector – electric vehicle (EV) charging platforms, for instance, and the electrification of Europe’s rail networks. Both these are hot topics as part of this clean mobility megatrend and their role in decarbonising transportation. We funded a major European charging point operator and a prominent player in the EV charging segment; we are proud to be one of the leaders in this field.

This kind of investment benefits society as [our investee company] plays a key role in the European energy transition, supports the decarbonisation of the mobility sector, and helps people make the transition to energy-efficient EVs by offering easily accessible, free charging points for all types of EV users. This is really the type of financing we seek to do as part of the energy transition.

AC: What kind of innovation and new assets are you seeing in the infrastructure market today?

SP: Let me start with batteries. Batteries support the development and stability of low-carbon infrastructure. For example, they are used to stabilise the [electricity] grid and optimise usage and transmission.

Electricity can be stored in batteries when too much power is generated and released when demand exceeds generation. Batteries are essential for electric vehicles and there are financing opportunities arising from the development of gigafactories, which we have seen in France and Sweden recently.

Along  the value chain, securing critical minerals and metals for batteries is a big theme in Europe with a focus on securing local supplies and production.

Another example is hydrogen, which can be used for electricity production. Green hydrogen produced using low cost, abundant renewable energy makes it a promising low-carbon energy carrier. It can be stored, used to produce green steel or converted back to electricity via fuel cells. It can also be used for heavy vehicle transport. So, we see plenty of interesting financing opportunities linked to the development of green hydrogen.

VG: As lenders, we need to have the resources and expertise to evaluate this type of project while maintaining an adequate risk profile. The full value chain needs to be analysed, from technology to market research to income generation. We need to offer bespoke financing solutions, investing proactively to take advantage of early-stage opportunities to capture the best risk/return.

At BNP Paribas Asset Management, we enjoy privileged access to BNP Paribas Group’s worldwide infrastructure franchise, providing deep market knowledge, especially on low-carbon assets and supporting us in the sourcing of assets for investment.

It is a great time to be in this new sector and help the energy transition by financing these types of assets.

AC: Thank you very much for joining us today.

SP & VG: Thank you, Andrew.

Disclaimer

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.

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