What are the biggest myths when it comes to infrastructure-debt?
Investing money in infrastructure helps to set up projects like airports, electricity, gas transmissions, telecommunications & transportation facilities, roads, water supply and lots of other services. It is undoubtedly a sound investment but generating cash flow in infrastructure projects is slow.
Infrastructure assets yield fixed income component as well as Infrastructure debt. As a complex investment category, infrastructure debt is well-managed by knowledgeable and sophisticated institutional investors who can interpret all the rigmarole and complicated work involved in investments. However, your reward will be the long-dated, stable, cash flow-driven returns.
Debunking infrastructure debt myths
For the past years, institutional investors have been giving infrastructure debt greater attention. Its key outcomes are high and it is low risk for it has experienced low historical losses on default.
Myth 1 - Infrastructure is new asset class; therefore untested.
Fact – Infrastructure is neither new nor untested. It has privately participated in the asset class for some time— mainly in the equity part of the capital structure. For some time, infrastructure investment has been privately participating in infrastructure investment specifically in the capital structure’s equity part. Private investments in Western Europe have been inspiring confidence among would-be lenders.
Myth 2 - Infrastructure debt investments keep your money tied down for a long time.
Fact –The answer is no, as these assets are up and running; they have already generated revenues, so they can deliver cash yields immediately. These are misconceptions dating back to the finance-dominated type of bank-led project of infrastructure lending dating back more than 30 years ago.
Myth 3- It won’t hold up when interest rates move higher.
Fact – Yes, they can. Infrastructure loans can be floating rate and they may offer a good hedge against rising interest rates and higher inflation. But it does not mean that its interest rates will not go higher.
Myth 4 – Go after higher yields to bring home higher rewards.
Fact – But under favourable conditions, infrastructure shares will stay as an incentive to access higher profits safely; cash is expected to generate lower returns increasingly. Assets of core economic infrastructure share several key attributes. As long-life physical assets, they support economic growth that is essential to deliver services and facilities that cannot be replicated or replaced. As a result, they tend to offer secure long-term revenue streams.
Myth 5 -There aren’t enough investable opportunities.
Fact – It is not true as this heavy shortfall brings greater opportunities for long-term investors in the debt aspect of infrastructure projects. It’s estimated that there will be an annual gap infrastructure investment needs and available public funds until 2030.
Benefits of Infrastructure debt:
It lowers returns and is not involved in the disadvantage of the infrastructure asset.
It is less risky.
Its investment term is shorter and its maturity is typically 3-7 years.
It does not necessarily benefit from the same inflation protection as the underlying asset – particularly in the case of fixed-rate bonds.
Conclusion: Don’t believe in these myths as infrastructure debts will generate long-term funds. This represents big opportunities for long-term infrastructure investors, particularly since projects generally require several rounds of refinancing before it starts generating profits.