Q4 2020 Index Release Comment
Q4 2020 Index Release – Infrastructure and Covid: Was 2020 a bad year or the worst year?
2020 was a reminder that economic shocks can impact the bottom line of many infrastructure companies, which may also lead to solvency issues in some sectors. It was also a test of the resilience of the asset class. Above all, it was a reminder that asset valuations eventually have to reflect market prices, that is, the value implied by the risks taken by investors.
After a positive Q4 2020 with a 3.04% total return (in local currency), the infra300 index, which tracks a global sample of unlisted infrastructure equity investments worth approximately USD180bn, finished 2020 down -4.7%, combining an estimated -12.6% drop in capital value with a +7.9% estimated cash yield, year-on-year.
During 2020, the market valuations of unlisted infrastructure companies suffered from the combined impact of lower cash flows due to Covid-19 lockdowns and the ensuing economic shock and a higher unlisted infrastructure equity risk premium (+150bp year-on-year for the infra300). The decrease in interest rates, already at record lows, only provided limited relief to asset prices.
There is a marked divergence in the impact of Covid-19 on infrastructure corporates, dominated by large transport and utilities companies, and that of infrastructure projects. The EDHECinfra project finance SPV index, which tracks more than 400 live project companies (500 over the past 20 years), finished the year up 2.1% on a year-on-year basis, with a solid 3.6% quarterly total return in Q4 2020. On a 5-year basis, infrastructure projects show strong returns of 10.3% per annum, with 8.5-9% volatility and a one-year, 99.5% VaR below 15%.
This contrasts with ‘corporates.’ Despite a positive Q4 2020 (+1.3%) the index for this segment which tracks 125 unlisted infrastructure companies globally is down -13.5% on a year-on-year basis at the end of 2020. Despite a cash yield of 8.1%, capital returns are -21.6% for the year. This is even worse than what this segment of the infrastructure asset class went through during the GFC in terms of maximum drawdown.
Meanwhile, the private infrastructure debt market has not seen the same impact from Covid. The EDHECinfra Broad market private debt infrastructure index, which tracks 1,034 instruments representing US$250bn of value, delivered a 6% total return year-on-year, improving on its 3 to 5-year performance by 50bp, and returning 1.2% on the quarter on account of lower rates and stable credit spreads. Project finance debt continues to outperform corporate infrastructure debt on a 5 to 10-year basis having delivered 4.9% returns in 2020, but with lower risk and higher spreads (+50bp on average) than infrastructure corporate debt.
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