European infrastructure bond volumes rose sevenfold last year as companies took advantage of a renewed appetite for the long-dated debt among insurers to revive a moribund market.
The volume of infrastructure bonds issued in western Europe rose to $7.5bn from 14 deals last year, up from $1bn spread over three deals in 2012, according to figures from Dealogic, bucking several years of meagre growth in the wake of the financial crisis.
“The market has been boosted by significant demand from pension funds, insurance companies and long dated investors for high quality infrastructure assets,” said Andrew Paulson, managing director in secured debt markets at Royal Bank of Scotland. “In parallel, infrastructure companies have sought to diversify their funding sources, taking advantage of historically cheap financing opportunities.”
Year to date European issuance stands at $3.2bn with five deals, mostly in the UK then Belgium and Denmark, compared with $3.6bn over the same period in 2013, all from UK deals.
The market’s revival is being driven by companies such as Ferrovial, joint owners of Heathrow airport, investing in its new Terminal 2. Meanwhile, banks, traditionally big performers in Europe’s infrastructure market, are scaling down loans to the sector amid deleveraging and Basel III regulations, which force them to hold more capital.
“The core infrastructure sector has shown resilience throughout the economic downturn, especially the big airports and ports, and so investing in the strong performers in the asset class remains popular,” said Mr Paulson.
Institutional investors, such as insurers, have shown reluctance to invest in infrastructure because assets incur relatively high capital charges under Solvency II.
However, Michael Wilkins managing director in the project finance ratings team at Standard & Poor’s, said wafer-thin yields on offer elsewhere and predictability of revenues made infrastructure look attractive in comparison.
“There’s far more interest than ever before from insurers and pension funds,” he said. “It’s not just bond issues, there has been an increase in private placements and direct infrastructure financing as yields compress in the sovereign and corporate spaces.”
Not all is rosy. For example, project finance volumes – where debt is raised to build a project and creditors are paid back from operational revenues – remains relatively subdued.
Some investors complain about a lack of projects to invest in, particularly as public finances in many countries remain precarious. In addition, some infrastructure projects do not offer the kind of long-term revenue stability investors are looking for. Toll roads, for example, tend to be cyclical as cash-strapped motorists avoid them during recessions.
A report by S&P this year estimated the gap between global infrastructure needs and available public sector funds at about $500bn a year. It said that in spite of the need for road and power projects, capital investment by governments in the US and Europe has dropped from about 3 per cent to 2 per cent of gross domestic product since 2009 – slack that could be picked up by institutions.