Who is afraid of Construction Risk? Portfolio Construction with Infrastructure Debt

by Frédéric Blanc-Brude, Omneia R H Ismail
Abstract:
This paper is the first of series discussing the opportunity for long-term institutional investors such as pension funds, insurance companies or sovereign wealth funds, to invest in large portfolios of infrastructure debt, both to manage their liabilities and to minimise their exposure to capital market volatility. Our analysis focuses on project finance debt since it represents the bulk of existing and, in all likelihood, future infrastructure debt. Moreover, contrary to the notion of `infrastructure’, project finance benefits from a clear and internationally recognised definition.

In what follows, we review existing academic research on infrastructure project finance and propose a theoretical and empirical analysis of the role of credit risk in infrastrcture debt from a portfolio standpoint, on a held-to-maturity basis. Indeed, the distinctive nature of infrastructure project debt is best captured through the lens of credit risk. Moreover, infrastructure project finance debt is typically priced as a floating rate instrument using a benchmark rate and a credit spread.

Publication focus:

Academic finance
some
Risk Management
some
Asset pricing
some
Maths
not much
Stats
a fair amount
part of the EDHEC/NATIXIS Research Chair 2012-2015
Reference:
Who is afraid of Construction Risk? Portfolio Construction with Infrastructure Debt (Frédéric Blanc-Brude, Omneia R H Ismail), In EDHEC-Risk Institute Publications, EDHEC Risk Institute-Asia, 2013.