Infrastructure debt is benefitting as bonds regain their traditional place at the core of asset allocation. Infrastructure debt funds grew from US$80 billion to more than $139 billion between 2020 and 2022.
According to a White & Case report in January, infrastructure issuers have been shielded from rising debt costs because most capital structures are hedged or have fixed interest rate charges. It also points to energy transition as “another busy area that could be relatively insulated from macro headwinds”, with McKinsey estimates of $9.2 trillion needed per annum to deliver net zero commitments by 2050. That’s a powerful draw for institutions committed to investing in sustainable assets.
Infrastructure bonds are hardly untested. US institutions have been financing tax-free civic improvement bond issuances for decades before the infrastructure label came along to make them seem even more topical. According to the Municipal Bonds for America’s website, more than $2 trillion of new infrastructure investments were financed with muni bonds over the past decade, with another $2 trillion – $3 trillion expected in the decade ahead. Many munis are rated triple-A. And that’s only one category of infrastructure bond in one market. There is a slew of similar opportunities in other countries.
Infrastructure bonds have also held up pretty well on the debt spectrum. According to a study by S&P Global published in December, their two-year average cumulative default rate from 1981 to 2021 was 0.87% versus 3.8% for global non-financial corporates. Even for projects that do default, the average recovery rate of 77.3% is much higher than the 60% for non-financial corporates.
In short, bond investors have all kinds of avenues into infrastructure bonds without going into development finance at all.
There is one other peripheral yet persuasive argument in favour of infrastructure bonds. As has often been observed, returns are far more quantifiable than risk, which is much more subjective. Investors may be forgiven for hesitating to invest in developing economy infrastructure bonds on risk grounds. But it’s far less easy to forgive when they also allocate to absurdities like crypto mining and overinflated venture capital, which have now predictably cratered.
Geopolitical and a whole host of other factors have caused a worldwide reappraisal of risk. Perhaps it’s time to re-examine infrastructure bonds in that light.
